Explaining abnormal returns in stock markets: An alpha-neutral version of the CAPM

Francesco Rocciolo, Andrea Gheno and Chris Brooks

International Review of Financial Analysis, 2022, vol. 82, issue C

Abstract: This paper develops a behavioural asset pricing model in which traders are not fully rational as is commonly assumed in the literature. The model derived is underpinned by the notion that agents’ preferences are affected by their degree of optimism or pessimism regarding future market states. It is characterized by a representation consistent with the Capital Asset Pricing Model, augmented by a behavioural bias that yields a simple and intuitive economic explanation of the abnormal returns typically left unexplained by benchmark models. The results we provide show how the factor introduced is able to absorb the “abnormal” returns that are not captured by the traditional CAPM, thereby reducing the pricing errors in the asset pricing model to statistical insignificance.

Keywords: Asset pricing model; Behavioural asset pricing; Optimism/pessimism; Abnormal returns (search for similar items in EconPapers)
JEL-codes: G12 G40 G41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:82:y:2022:i:c:s1057521922001089

DOI: 10.1016/j.irfa.2022.102143

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