Download pdf
The Limitaitons and Alternatives of CAPM
- 1 Jiangxi University Of Finance and Economics
* Author to whom correspondence should be addressed.
Abstract
The Capital Asset Pricing Model (CAPM), a conventional financial model, has undergone extensive testing. This research critically examines the limitations of CAPM from four distinct perspectives and offers alternative frameworks. Specifically, this paper delves into these issues through the lens of the Conditional CAPM. Traditionally, CAPM has been viewed as a simplistic single-factor model. The limitations addressed here encompass temporal constraints, uniform expectations, the role of consumption factors, and underlying assumptions of rationality. This study employs a systematic literature review methodology to conduct its analysis. Through carefully selecting samples, our investigation reveals a correlation between the number of papers published and the years in question. Furthermore, certain keywords surface more frequently, indicating emerging phenomena and trends. However, our primary focus remains aligned with the research inquiry, leading us to select 12 samples for in-depth exploration. Ultimately, this paper argues that the Intertemporal CAPM (ICAPM) may ameliorate the time-related constraints inherent in traditional CAPM. Additionally, the Liquidity CAPM (LCAPM) factors in liquidity considerations, offering improvements to CAPM. The Consumption CAPM (CCAPM) augments CAPM's comprehensiveness by introducing consumption factors. Furthermore, the alpha-neutral CAPM and the sentiment-scaled model both acknowledge the influence of investor behaviour on asset pricing.
Keywords
Capital Asset Pricing Method, limitations, literature review
[1]. Rocciolo, F., Gheno, A., & Brooks, C. (2018). Explaining Abnormal Returns in Stock Markets: An Alpha-Neutral Version of the CAPM. Available at SSRN 3173138.
[2]. Borup, D. (2019). Asset pricing model uncertainty. Journal of Empirical Finance, 54, 166-189.
[3]. Doukas, J. A., & Han, X. (2021). Sentiment‐scaled CAPM and market mispricing. European Financial Management, 27(2), 208-243.
[4]. Lin, P. T. (2021). Intertemporal risk-return relationship in housing markets. Journal of Real Estate Research, 44(3), 331-354.
[5]. Barroso, P., Boons, M., & Karehnke, P. (2021). Time-varying state variable risk premia in the ICAPM. Journal of Financial Economics, 139(2), 428-451.
[6]. Altay, E., & Çalgıcı, S. (2019). Liquidity adjusted capital asset pricing model in an emerging market: Liquidity risk in Borsa Istanbul. Borsa Istanbul Review, 19(4), 297-309.
[7]. Ma, X., Zhang, X., & Liu, W. (2021). Further tests of asset pricing models: Liquidity risk matters. Economic Modelling, 95, 255-273.
[8]. Zheng, D., Ding, S., Cui, T., & Jin, H. (2022). Real economy effects on consumption-based CAPM. Mathematics, 10(3), 360.
[9]. Galicia-Sanguino, L., Rojo-Suárez, J., Alonso-Conde, A. B., & López-Pérez, M. V. (2021). Trade integration and research and development investment as a proxy for idiosyncratic risk in the cross-section of stock returns. Pacific-Basin Finance Journal, 68, 101623.
[10]. Doukas, J. A., & Han, X. (2021). Sentiment‐scaled CAPM and market mispricing. European Financial Management, 27(2), 208-243.
Cite this article
Bin,Y. (2024). The Limitaitons and Alternatives of CAPM . Advances in Economics, Management and Political Sciences,60,46-51.
Data availability
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.
Disclaimer/Publisher's Note
The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of EWA Publishing and/or the editor(s). EWA Publishing and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content.
About volume
Volume title: Proceedings of the 2nd International Conference on Financial Technology and Business Analysis
© 2024 by the author(s). Licensee EWA Publishing, Oxford, UK. This article is an open access article distributed under the terms and
conditions of the Creative Commons Attribution (CC BY) license. Authors who
publish this series agree to the following terms:
1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons
Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this
series.
2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published
version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial
publication in this series.
3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and
during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See
Open access policy for details).