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Asset Pricing Model Estimation Errors During Rational And Irrational Investor Behavior Periods

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  • Michael G. Marsh
  • Marc Muchnick

Abstract

This paper examines the prediction that human behavior changes the outcome of market predictability, indicated by a difference in asset pricing model estimated prediction error, calculated using the Sharpe ratio, Jensen’s alpha, and the Treynor measure for publicly traded firms in the consumer discretionary and consumer staples sectors. Applying a series of independent t-tests to mean comparisons of these measures ultimately provided mixed results, demonstrating a statistically significant difference only with Jensen’s alpha and the Sharpe ratio in both sectors. This indicates a need for extra caution for asset pricing model use under potentially irrational periods

Suggested Citation

  • Michael G. Marsh & Marc Muchnick, 2019. "Asset Pricing Model Estimation Errors During Rational And Irrational Investor Behavior Periods," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 13(2), pages 45-69.
    • Handle: RePEc:ibf:ijbfre:v:13:y:2019:i:2:p:45-69
    as

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    References listed on IDEAS

    as
    1. Raymond Kan & Cesare Robotti & Jay Shanken, 2013. "Pricing Model Performance and the Two‐Pass Cross‐Sectional Regression Methodology," Journal of Finance, American Finance Association, vol. 68(6), pages 2617-2649, December.
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    5. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. "Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
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    More about this item

    Keywords

    Asset Pricing; Behavioral Finance; Irrationality; Beta;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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