Information and capital asset pricing

Baibing Li and Xiangkang Yin

The European Journal of Finance, 2011, vol. 17, issue 7, 505-523

Abstract: 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.

Keywords: asset pricing; asymmetric information; CAPM anomaly; rational expectations equilibrium (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/1351847X.2010.495476

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