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A rational pricing explanation for the failure of CAPM

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  • Hui Guo

Abstract

Many authors have found that the capital asset pricing model (CAPM) does not explain stock returns?possibly because it is only a special case of Merton?s (1973) intertemporal CAPM under the assumption of constant investment opportunities (e.g., a constant expected equity premium). This paper explains the progress that has been made by dropping the assumption that expected returns are constant. First, the evidence on the predictability of returns is summarized; then, an example from Campbell (1993) is used to show how time-varying expected returns can lead to the rejection of the CAPM.

Suggested Citation

  • Hui Guo, 2004. "A rational pricing explanation for the failure of CAPM," Review, Federal Reserve Bank of St. Louis, vol. 86(May), pages 23-34.
    • Handle: RePEc:fip:fedlrv:y:2004:i:may:p:23-34:n:v.86no.3
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    Cited by:

    1. Agnello, Richard J., 2016. "Do U.S. paintings follow the CAPM? Findings disaggregated by subject, artist, and value of the work," Research in Economics, Elsevier, vol. 70(3), pages 403-411.
    2. Michael C. Nwogugu, 2020. "Decision-Making, Sub-Additive Recursive "Matching" Noise And Biases In Risk-Weighted Stock/Bond Index Calculation Methods In Incomplete Markets With Partially Observable Multi-Attribute Pref," Papers 2005.01708, arXiv.org.
    3. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.

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    Keywords

    Stock market; capital asset pricing model;

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