Related papers: A note on the CAPM with endogenously consistent ma…
Factor modeling of asset returns has been a dominant practice in investment science since the introduction of the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). The factors, which account for the systematic risk,…
The Capital Asset Pricing Model (CAPM) relates a well-diversified stock portfolio to a benchmark portfolio. We insert size effect in CAPM, capturing the observation that small stocks have higher risk and return than large stocks, on…
We explore a decomposition in which returns on a large class of portfolios relative to the market depend on a smooth non-negative drift and changes in the asset price distribution. This decomposition is obtained using general continuous…
The principal portfolios of the standard Capital Asset Pricing Model (CAPM) are analyzed and found to have remarkable hedging and leveraging properties. Principal portfolios implement a recasting of any correlated asset set of N risky…
We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the…
We analyse the effect of a proportional wealth tax on asset returns, portfolio choice, and asset pricing. The tax is levied annually on the market value of all holdings at a uniform rate. We show that such a tax is economically equivalent…
This paper describes the dependence of market-based statistical moments of returns on statistical moments and correlations of the current and past trade values. We use Markowitz's definition of value weighted return of a portfolio as the…
We consider a class of generalized capital asset pricing models in continuous time with a finite number of agents and tradable securities. The securities may not be sufficient to span all sources of uncertainty. If the agents have…
Providing a measure of market risk is an important issue for investors and financial institutions. However, the existing models for this purpose are per definition symmetric. The current paper introduces an asymmetric capital asset pricing…
The Capital Asset Pricing Model (CAPM) is one of the original models in explaining risk-return relationship in the financial market. However, when applying the CAPM into reality, it demonstrates a lot of shortcomings. While improving the…
We demonstrate market inefficiency in cryptoasset markets. Our approach examines investments that share a dominant risk factor but differ in their exposure to a secondary risk. We derive equilibrium restrictions that must hold regardless of…
The CAPM regression is typically interpreted as if the market return contemporaneously \emph{causes} individual returns, motivating beta-neutral portfolios and factor attribution. For realized equity returns, however, this interpretation is…
We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French's data…
It is shown that the axioms for coherent risk measures imply that whenever there is an asset in a portfolio that dominates the others in a given sample (which happens with finite probability even for large samples), then this portfolio…
The paper has 2 main goals: 1. We propose a variant of the CAPM based on coherent risk. 2. In addition to the real-world measure and the risk-neutral measure, we propose the third one: the extreme measure. The introduction of this measure…
This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are…
We derive formulas for the performance of capital assets in continuous time from an efficient market hypothesis, with no stochastic assumptions and no assumptions about the beliefs or preferences of investors. Our efficient market…
We study how trading costs are reflected in equilibrium returns. To this end, we develop a tractable continuous-time risk-sharing model, where heterogeneous mean-variance investors trade subject to a quadratic transaction cost. The…
The estimation of asset return distributions is crucial for determining optimal trading strategies. In this paper we describe the constrained mixture model, based on a mixture of Gamma and Gaussian distributions, to provide an accurate…
We reverse-engineer the equilibrium construction process of asset prices in order to obtain returns which depend on firm characteristics, possibly in a linear fashion. One key requirement is that agents must have demands that rely…