Anchoring Adjusted Capital Asset Pricing Model

Hammad, Siddiqi (2015): Anchoring Adjusted Capital Asset Pricing Model.

Abstract

An anchoring adjusted Capital Asset Pricing Model (ACAPM) is developed in which the payoff volatilities of well-established stocks are used as starting points that are adjusted to form volatility judgments about other stocks. Anchoring heuristic implies that such adjustments are typically insufficient. ACAPM converges to CAPM with correct adjustment, so CAPM is a special case of ACAPM. The model provides a unified explanation for the size, value, and momentum effects in the stock market. A key prediction of the model is that the equity premium is larger than what can be justified by market volatility. Hence, anchoring also provides a potential explanation for the well-known equity premium puzzle. Anchoring approach predicts that stock splits are associated with positive abnormal returns and an increase in return volatility. The approach predicts that reverse stock-splits are associated with negative abnormal returns, and a fall in return volatility. Existing empirical evidence strongly supports these predictions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Size Premium, Value Premium, Behavioral Finance, Stock Splits, Equity Premium Puzzle, Anchoring Heuristic, CAPM, Asset Pricing, Momentum Effect
• Subjects: G - Financial Economics > G0 - General > G02 - Behavioral Finance: Underlying Principles; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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