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Anchoring-Adjusted Capital Asset Pricing Model

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  • Hammad Siddiqi

Abstract

What happens when the capital asset pricing model is adjusted for the anchoring and adjustment heuristic of Tversky and Kahneman [1974]? The surprising finding is that adjusting the capital asset pricing model for anchoring provides a plausible unified framework for understanding almost all of the key asset pricing anomalies. The anomalies captured in the theoretical framework include the well-known size and value effects, high alpha of low beta stocks, accruals, low volatility anomaly, momentum effect, stock splits, and reverse stock splits. The market equity premium is also larger with anchoring. This suggests that the anchoring-adjusted capital asset pricing model may provide the needed unifying structure to behavioral finance.

Suggested Citation

  • Hammad Siddiqi, 2018. "Anchoring-Adjusted Capital Asset Pricing Model," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 19(3), pages 249-270, July.
    • Handle: RePEc:taf:hbhfxx:v:19:y:2018:i:3:p:249-270
    DOI: 10.1080/15427560.2018.1378218
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    Cited by:

    1. Pedro Antonio Martín-Cervantes & María del Carmen Valls Martínez, 2023. "Unraveling the relationship between betas and ESG scores through the Random Forests methodology," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-29, September.
    2. Siddiqi, Hammad, 2019. "CAPM: A Tale of Two Versions," MPRA Paper 92798, University Library of Munich, Germany.
    3. Siddiqi, Hammad, 2022. "Asset Pricing in the Resource-Constrained Brain," MPRA Paper 120526, University Library of Munich, Germany, revised 05 Feb 2024.
    4. Ruwani Fernando, Jayasuriya Mahapatabendige & Li, Leon & Hou, Greg, 2021. "Heterogeneity in capital structure adjustment revisited: Default versus non-default firms and short versus long time horizon," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 185-204.

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