Π-CAPM: the classical CAPM with probability weighting and skewed assets
We propose a new asset pricing model that generalizes the mean-variance framework by including probability weighting, specifically the overweighting of rare, high-impact events. Our model — the Pi-CAPM — generates several new predictions: (i) skewness has a positive price effect, amplified by volati...
Saved in:
| Main Authors: | , , |
|---|---|
| Format: | Article (Journal) |
| Language: | English |
| Published: |
December 2025
|
| In: |
The review of financial studies
Year: 2025, Volume: 38, Issue: 12, Pages: 3497-3541 |
| ISSN: | 1465-7368 |
| DOI: | 10.1093/rfs/hhaf045 |
| Online Access: | Verlag, kostenfrei, Volltext: https://doi.org/10.1093/rfs/hhaf045
|
| Author Notes: | Joost Driessen, Sebastian Ebert, Joren Koëter |
| Summary: | We propose a new asset pricing model that generalizes the mean-variance framework by including probability weighting, specifically the overweighting of rare, high-impact events. Our model — the Pi-CAPM — generates several new predictions: (i) skewness has a positive price effect, amplified by volatility; (ii) the price effect of volatility is negative for left-skewed assets but positive for right-skewed assets; and (iii) option-implied variance premiums for stocks have a U-shaped relation to skewness, amplified by volatility. We find strong empirical support for these predictions. Finally, we show that the Pi-CAPM predicts an exaggerated co-movement of assets and can explain the correlation premium. |
|---|---|
| Item Description: | Online veröffentlicht am 14.07.2025 Gesehen am 13.01.2026 |
| Physical Description: | Online Resource |
| ISSN: | 1465-7368 |
| DOI: | 10.1093/rfs/hhaf045 |