Π-CAPM: the classical CAPM with probability weighting and skewed assets
We propose a new asset pricing model which generalizes the mean-variance framework by including probability weighting, specifically the overweighting of rare, high-impact events. Our model—the Π-CAPM—allows for disentangling volatility and skewness effects and predicts that idiosyncratic risk is pri...
Saved in:
| Main Authors: | , , |
|---|---|
| Format: | Article (Journal) Book/Monograph |
| Language: | English |
| Published: |
Rochester, NY
Elsevier
November 22, 2022
|
| DOI: | 10.2139/ssrn.3711478 |
| Online Access: | Verlag, kostenfrei, Volltext: https://doi.org/10.2139/ssrn.3711478 Verlag, lizenzpflichtig, Volltext: https://papers.ssrn.com/abstract=3711478 Verlag, kostenfrei: https://ssrn.com/abstract=3711478 
|
| Author Notes: | Joost Driessen, Sebastian Ebert and Joren Koëter |
| Summary: | We propose a new asset pricing model which generalizes the mean-variance framework by including probability weighting, specifically the overweighting of rare, high-impact events. Our model—the Π-CAPM—allows for disentangling volatility and skewness effects and predicts that idiosyncratic risk is priced. We show that the price impact of volatility is skewness-dependent, negative for left-skewed assets but potentially positive for right-skewed assets. Further, probability weighting translates into an exaggerated co-movement of assets and can explain the empirical correlation premium. Finally, we empirically verify that option-implied variance premiums for individual stocks have a U-shaped relation to the stock’s skewness, as predicted by the Π-CAPM. |
|---|---|
| Item Description: | Enthält Online-Anhang mit separater Zählung (26 Seiten) Gesehen am 20.03.2023 |
| Physical Description: | Online Resource |
| DOI: | 10.2139/ssrn.3711478 |
| Access: | Open Access |