Revisiting the ICAPM under the distortion of risk–return tradeoff in short‐horizon stock returns

Abstract

We suggest that the distortion of the positive risk–return relation in the ICAPM is a consequence of trading by informed investors to exploit mispricing. We hypothesize and demonstrate that a non‐positive (strongly positive) risk–return relation following positive (negative) market returns is attributed to short‐selling (purchasing) of overpriced (underpriced) stocks along with optimistic (pessimistic) expectations conditional on good (bad) market news. We verify this asymmetry in the risk–return relation through the indirect risk–return relation conditional on good (bad) market news. We also find that the attenuation (reinforcement) of the positive risk–return relation is more profound in high‐ (low‐) sentiment periods.

Exploring the Timing Stock Selection Ability of U.S. Active Index Fund ETF Based on T-M Model

“…In recent years research which why investment managers misunderstand whole market trending and returning, the reasons for the non-positive (positive) correlation between the relationship of risk-returning and the overall market return are attributed to buying and selling overpriced(underpriced) investment index funds and misjudgment of market massages. A significant number of funding managers mistakenly use short-term risk-free market returns such three-month maturity of U.S. treasury bonds as a measure and add into the model [11]. They ignore unpredictable future risks and whether they will negate the gains already made.…”