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Information and capital asset pricing

journal contribution
posted on 2011-01-01, 00:00 authored by B Li, Xiangkang YinXiangkang Yin
Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic capital asset pricing model's (CAPM) assumption of complete agreement among investors. To accommodate information asymmetry and belief updating, we have developed an empirically testable information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by the information-adjusted beta rather than the market beta. The model is then used to analyze empirical anomalies of the classic CAPM, including a flatter relation between average return and the market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of the market beta, and size effect.

History

Journal

European journal of finance

Volume

17

Issue

7

Pagination

505 - 523

Publisher

Taylor and Francis

Location

Abingdon, Eng.

ISSN

1351-847X

eISSN

1466-4364

Language

eng

Publication classification

C Journal article; C1.1 Refereed article in a scholarly journal

Copyright notice

2011, Taylor & Francis