Anchoring Adjusted Capital Asset Pricing Model

Hammad Siddiqi

No 211224, Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics

Abstract: An anchoring adjusted Capital Asset Pricing Model (ACAPM) is developed in which the payoff volatilities of well-established stocks are used as starting points that are adjusted to form volatility judgments about other stocks. Anchoring heuristic implies that such adjustments are typically insufficient. ACAPM converges to CAPM with correct adjustment, so CAPM is a special case of ACAPM. The model provides a unified explanation for the size, value, and momentum effects in the stock market. A key prediction of the model is that the equity premium is larger than what can be justified by market volatility. Hence, anchoring could potentially provide an explanation for the well-known equity premium puzzle. Anchoring approach predicts that stock splits are associated with positive abnormal returns and an increase in return volatility. The approach predicts that reverse stock-splits are associated with negative abnormal returns, and a fall in return volatility. Existing empirical evidence strongly supports these predictions.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 30
Date: 2015-10
New Economics Papers: this item is included in nep-acc and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:uqsers:211224

DOI: 10.22004/ag.econ.211224

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