Capital Asset Pricing Model with Size Factor and Normalizing by Volatility Index

Abraham Atsiwo and Andrey Sarantsev

Papers from arXiv.org

Abstract: The Capital Asset Pricing Model (CAPM) relates a well-diversified stock portfolio to a benchmark portfolio, usually taken to be the S\&P 500. We insert size effect in the CAPM, capturing a real-life feature that on average, small stocks (measured by market capitalization) have higher risk and return than large stocks. Testing CAPM involves fitting linear regressions. Our goal is to ensure that regression residuals are independent identically distributed Gaussian. In some cases, we find that including the Volatility Index as a multiplicative factor by these residuals makes them closer to that ideal. In this article, we combine these ideas to create a new discrete-time model, which includes volatility, size factor, and the CAPM. We fit this model using real-world data, prove the long-term stability of this model, and analyze the resulting capital distribution curves.

Date: 2024-11, Revised 2026-09
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://arxiv.org/pdf/2411.19444 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2411.19444

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().