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Information and capital asset pricing

Author

Listed:
  • Baibing Li
  • Xiangkang Yin

Abstract

Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic capital asset pricing model's (CAPM) assumption of complete agreement among investors. To accommodate information asymmetry and belief updating, we have developed an empirically testable information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by the information-adjusted beta rather than the market beta. The model is then used to analyze empirical anomalies of the classic CAPM, including a flatter relation between average return and the market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of the market beta, and size effect.

Suggested Citation

  • Baibing Li & Xiangkang Yin, 2011. "Information and capital asset pricing," The European Journal of Finance, Taylor & Francis Journals, vol. 17(7), pages 505-523.
    • Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:505-523
    DOI: 10.1080/1351847X.2010.495476
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    Cited by:

    1. Mauro Andriotto & Emanuele Teti, 2014. "Beyond CAPM: an innovative factor model to optimize the risk and return trade-off," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(4), pages 615-630, September.
    2. Giuseppe Galloppo & Giovanni Trovato, 2017. "Fundamental driver of fund style drift," Journal of Asset Management, Palgrave Macmillan, vol. 18(2), pages 99-123, March.

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