Explaining Abnormal Returns in Stock Markets: An Alpha-Neutral Version of the CAPM

Rocciolo, Francesco; Gheno, Andrea; Brooks, Chris

doi:10.2139/ssrn.3173138

Cited by 1 publication

(1 citation statement)

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“…For instance, the abnormally flat correlation between investment returns and market beta, a lack of explanatory capacity for this idea, and occasionally even a negative correlation, and the volatility of market beta over time, where the return can vary between firms with different book-to-equity ratios even though the market beta is the same. [1] Regarding the constraints imposed by beta, there are still some other uncertainties brought on by issues with the environment, such that the factor structure in returns undergoes changes over time. Factor exposures are most likely time-varying due to modifications in the event portfolio's composition over time or changes in the local economic environment.…”

Section: Introductionmentioning

confidence: 99%

The Limitaitons and Alternatives of CAPM

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2024

AEMPS

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The Capital Asset Pricing Model (CAPM), a conventional financial model, has undergone extensive testing. This research critically examines the limitations of CAPM from four distinct perspectives and offers alternative frameworks. Specifically, this paper delves into these issues through the lens of the Conditional CAPM. Traditionally, CAPM has been viewed as a simplistic single-factor model. The limitations addressed here encompass temporal constraints, uniform expectations, the role of consumption factors, and underlying assumptions of rationality. This study employs a systematic literature review methodology to conduct its analysis. Through carefully selecting samples, our investigation reveals a correlation between the number of papers published and the years in question. Furthermore, certain keywords surface more frequently, indicating emerging phenomena and trends. However, our primary focus remains aligned with the research inquiry, leading us to select 12 samples for in-depth exploration. Ultimately, this paper argues that the Intertemporal CAPM (ICAPM) may ameliorate the time-related constraints inherent in traditional CAPM. Additionally, the Liquidity CAPM (LCAPM) factors in liquidity considerations, offering improvements to CAPM. The Consumption CAPM (CCAPM) augments CAPM's comprehensiveness by introducing consumption factors. Furthermore, the alpha-neutral CAPM and the sentiment-scaled model both acknowledge the influence of investor behaviour on asset pricing.

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Section: Introductionmentioning

confidence: 99%

The Limitaitons and Alternatives of CAPM

Bin

2024

AEMPS

View full text Add to dashboard Cite

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Explaining Abnormal Returns in Stock Markets: An Alpha-Neutral Version of the CAPM

Cited by 1 publication

References 88 publications

The Limitaitons and Alternatives of CAPM

The Limitaitons and Alternatives of CAPM

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