Explaining abnormal returns in stock markets: an alpha-neutral version of the CAPM

Rocciolo, F., Gheno, A. and Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153 (2022) Explaining abnormal returns in stock markets: an alpha-neutral version of the CAPM. International Review of Financial Analysis, 82. 102143. ISSN 1057-5219 doi: 10.1016/j.irfa.2022.102143

Abstract/Summary

This paper develops a behavioural asset pricing model in which traders are not fully rational as is commonly assumed in the literature. The model derived is underpinned by the notion that agents’ preferences are affected by their degree of optimism or pessimism regarding future market states. It is characterized by a representation consistent with the Capital Asset Pricing Model, augmented by a behavioural bias that yields a simple and intuitive economic explanation of the abnormal returns typically left unexplained by benchmark models. The results we provide show how the factor introduced is able to absorb the “abnormal” returns that are not captured by the traditional CAPM, thereby reducing the pricing errors in the asset pricing model to statistical insignificance.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/117838
Identification Number/DOI	10.1016/j.irfa.2022.102143
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
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