The CAPM strikes back? An equilibrium model with disasters
Journal
Journal of Financial Economics
Subject
Finance
Publishing details
Authors / Editors
Kung H;Bai H;Hou K;Zhang L
Biographies
Publication Year
2019
Abstract
Embedding disasters into a general equilibrium model with heterogeneous firms induces strong nonlinearity in the pricing kernel, helping explain the empirical failure of the (consumption) CAPM. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples without disasters and its relative success in samples with disasters. Due to beta measurement errors, the estimated beta-return relation is flat, consistent with the beta “anomaly,” even though the true beta-return relation is strongly positive. Finally, the consumption CAPM fails in simulations, even though a nonlinear model with the true pricing kernel holds exactly by construction.
Available on ECCH
No
