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The Lost Capital Asset Pricing Model

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  • Cujean, Julien
  • Andrei, Daniel
  • Wilson, Mungo

Abstract

A flat Securities Market Line is not evidence against the CAPM. Under the Roll (1977) critique, the CAPM is a "lost city of Atlantis," empirically invisible. In a noisy rational-expectations economy, there exists an information gap between the average investor who holds the market and the empiricist who does not observe the market portfolio. The CAPM holds for the investor, but appears flat to the empiricist. This distortion is empirically substantial and explains, for instance, why "Betting Against Beta" works; BAB really bets on true beta. Macroeconomic announcements reduce the distortion---for a fleeting moment the empiricist catches a glimpse of the CAPM.

Suggested Citation

  • Cujean, Julien & Andrei, Daniel & Wilson, Mungo, 2018. "The Lost Capital Asset Pricing Model," CEPR Discussion Papers 12607, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12607
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    2. Andreas Neuhierl & Michael Weber & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo.
    3. Jianjun Miao & Dongling Su, 2023. "Asset market equilibrium under rational inattention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(1), pages 1-30, January.
    4. Cujean, Julien & Andrei, Daniel & Fournier, Mathieu, 2019. "The Low-Minus-High Portfolio and the Factor Zoo," CEPR Discussion Papers 14153, C.E.P.R. Discussion Papers.
    5. Hendershott, Terrence & Livdan, Dmitry & Rösch, Dominik, 2020. "Asset pricing: A tale of night and day," Journal of Financial Economics, Elsevier, vol. 138(3), pages 635-662.
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    7. de Oliveira Souza, Thiago, 2020. "Observable implications of the conditional CAPM," Discussion Papers on Economics 13/2020, University of Southern Denmark, Department of Economics.
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