Beruflich Dokumente
Kultur Dokumente
Comments
1. Overall, I felt the paper was a good primer that confirms the role of
the CAPM as the lingua franca of finance, regardless of neoclassical
or behavioral schools. It is a much more robust model than the first
type suggested by Sharpe, Lintner, and Mossin.
2. Yet at the same time, despite the optimistic tone of the title of the
paper, the conclusion is somewhat less cheerful for future researchers.
After all, the major criticism in the finance world has been that the
researchers have had diculties in escaping from the CAPM paradigm.
To quote Due (1992):
To someone who came out of graduate school in the mideighties, the decade spanning roughly 196979 seems like a
golden age of dynamic asset pricing theory . . . The decade
or so since 1979 has, with relatively few exceptions, been a
mopping-up operation.
3. However, the paper does not help bridge the empirical gap of the
CAPM. The poor explanatory power of the CAPM in its most baseline
form means that the model has to be modified in one way or the other.
4. Moreover, the authors point that the CAPM holds on an ex ante basis
with experimental beta is far too naive.
5. Although the CAPM is robust to a wide range of alternative specifications (non-EUT preferences, Safety-First rule assumptions...) the
model no longer holds when all these alternative assumptions are held
at the same time.
Research Ideas
1. There are many variants of the CAPM - consumption CAPM, CAPM
with time-varying betas, human capital in the market portfolio etc.
Can a measure be constructed to give the winning hand to either of
these models?
2. Can the Fama-French 3-factor model be summarized into a single factor CAPM, under several assumptions?
2.1
2.2
3
3.1
3.2
3.3
3.4
3.5
Mean annual return of the market portfolio is about 12% with a standard deviation of about 20%, riskless interest rate of about 4%: hence
the slope of the CML is less than 1. Yet Baumols k must be greater
than 1.0 so the derivative requirement must hold.
By contrast, unlike in the case of Baumol, for Leshno and Levy the
market portfolio may be inecient and an alternative portfolio m may
dominate it. Yet since m is a linear combination of m and the riskless
asset, all investors will end up holding a combination of m and the
riskless asset.
4
4.1
Notable studies include Mandelbrot (1963), Fama (1965), Ocer (1972), Clark (1973), Gray and French (1990), Zhow (1993),
Mantegna and Stnaley (1995), Focardi and Fabozzi (2003), and
Levy and Duchin (2004).
Levy and Duchin (2004) show that the logistic distribution gives the
best fit on a monthly basis, yet other (lognormal) distributions are
fitted best under longer horizons.
Kroll et al. and Markowitz show that all risk-averse utility functions can be approximated locally by a quadratic function (ie a
function whose expected value depends only on location and scale
parameter). The utility loss caused by approximation is shown
to be negligible.
Other studies directly measure the financial loss due to the Normality assumption when the empirical rates are not normally distributed.
4.2
Ex ante beta
Levy and Roll (2008) however show that only minor adjustments
in mean and variance is needed to make the observed market
portfolio mean-variance portfolio.
4.2.3
Concluding remarks