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w_MPS Risk Aversion and the Shadow CAPM: Theory and Empirical Evidence

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journal contribution
posted on 02.10.2015, 14:36 by L. Huang, C. Ma, Hiroyuki Nakata
This paper presents the shadow Capital Asset Pricing Model (CAPM) of Ma (2011a) as an intertemporal equilibrium asset pricing model, and tests it empirically. In contrast to the classical CAPM - a single factor model based on a strong behavioral or distributional assumption, the shadow CAPM can be represented as a two factor model, and only requires a modest behavioral assumption of weak form mean-preserving spread (w-MPS) risk aversion. The empirical tests provide support in favor of the shadow CAPM over the classical CAPM, the Consumption CAPM, or the Epstein and Zin (1991) model. Moreover, the shadow CAPM provides a consistent explanation for the cross-sectional variations of expected returns on the stocks and for the time-varying equity premium.

History

Citation

European Journal of Finance 2015

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Management

Version

AM (Accepted Manuscript)

Published in

European Journal of Finance 2015

Publisher

Taylor & Francis (Routledge)

issn

1351-847X

eissn

1466-4364

Acceptance date

04/08/2015

Copyright date

2015

Available date

25/03/2017

Publisher version

http://www.tandfonline.com/doi/abs/10.1080/1351847X.2015.1082495

Language

en