Advanced Search
MyIDEAS: Login

A reformulated asset pricing model based on contrarian strategies

Contents:

Author Info

  • Zhongzhi (Lawrence) He
  • Lawrence Kryzanowski
Registered author(s):

    Abstract

    Purpose – Researchers have proposed characteristics-based pricing models as an alternative to risk-based pricing models. While supported empirically, these characteristic-based models lack theoretical support. This paper seeks to reformulate an asset-pricing model (RAPM) to demonstrate why firm characteristics help to explain stock returns. Design/methodology/approach – The RAPM is grounded in an economic setting where two groups of agents hold different beliefs about firm fundamental values, and the more sophisticated group (rationals) adopts contrarian strategies against the naïve group (quasis). The model is derived in a static equilibrium within the consumption-investment framework with heterogeneous agents. Findings – The key theoretical result is a parsimonious equation of cross-sectional expected returns that not only are specified by the traditional risk-return relation, but also are determined by contrarian adjustments at both market-wide and firm-specific levels. When the model is taken to empirical specifications, it leads to consistent explanations for the behaviors of growth and value stocks, and for size and book-to-market effects. Research limitations/implications – The RAPM is a one-period model that assumes that “rationals” have perfect knowledge about “quasis” sentiment parameter and their relative market weights. In future research, it is planned to extend this static model to multiple periods to incorporate a learning process by which “rationals” learn these parameters over time. Practical implications – The RAPM clearly identifies four criteria for implementing arbitrage opportunities in investments. These criteria formalize the common practices in the mutual/hedge fund industry. Originality/value – The paper develops an original framework that formally supports the characteristics-based models. It offers insights for researchers in behavioral finance and guidelines for investment practitioners.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=56B6475998888EAEB8221ABF859B8211?contentType=Article&contentId=1575950
    Download Restriction: Cannot be freely downloaded

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 23 (2006)
    Issue (Month): 3 (August)
    Pages: 185-201

    as in new window
    Handle: RePEc:eme:sefpps:v:23:y:2006:i:3:p:185-201

    Contact details of provider:
    Web page: http://www.emeraldinsight.com

    Order Information:
    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
    Email:
    Web: http://www.emeraldinsight.com/sef.htm

    Related research

    Keywords: Assets valuation; Modelling; Organizational behaviour; Risk assessment;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eme:sefpps:v:23:y:2006:i:3:p:185-201. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.