Bai, H, Hou, K, Kung, H, Li, E X N and Zhang, L (2019) The CAPM strikes back? An equilibrium model with disasters. Journal of Financial Economics, 131 (2). pp. 269-298. ISSN 0304-405X
Abstract
Embedding disasters into a general equilibrium model with heterogeneous firms induces strong nonlinearity in the pricing kernel, helping explain the empirical failure of the (consumption) CAPM. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples without disasters and its relative success in samples with disasters. Due to beta measurement errors, the estimated beta-return relation is flat, consistent with the beta “anomaly,” even though the true beta-return relation is strongly positive. Finally, the consumption CAPM fails in simulations, even though a nonlinear model with the true pricing kernel holds exactly by construction.
More Details
Item Type: | Article |
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Subject Areas: | Finance |
Date Deposited: | 17 Sep 2018 13:20 |
Date of first compliant deposit: | 11 Feb 2020 |
Subjects: |
Measurement Equilibrium theory |
Last Modified: | 21 Nov 2024 02:32 |
URI: | https://lbsresearch.london.edu/id/eprint/1011 |