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The Failure of Neoclassical Financial Economics: The Capital Asset Pricing Model and its Pillars as an Illustration

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Abstract

It is argued that the CAPM and its variants and extensions are theoretically invalid, empirically unsupported and practically useless. The efficient market hypothesis and the rational expectations hypothesis, which are two pillars of asset pricing models and neoclassical finance in general, have been invalidated by the advent of the global financial crisis and the development of alternative paradigms such as behavioural finance. It is also argued that the mushrooming of asset pricing models that bear no relevance to reality has been sustained by the excessive mathematisation of finance and the use of improper econometric procedures, including data mining.

Suggested Citation

  • Moosa, Imad, 2011. "The Failure of Neoclassical Financial Economics: The Capital Asset Pricing Model and its Pillars as an Illustration," Journal of Financial Transformation, Capco Institute, vol. 33, pages 69-76.
  • Handle: RePEc:ris:jofitr:1518
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    Keywords

    CAPM; Fama-French Model; Asset pricing;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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