Behavioral Asset Pricing Models

Paper Summary:

This paper explains that behavioral asset pricing models, based on real life behavior, are becoming more relevant and important. The author identifies the salient features of this model and compares traditional, capital (CAPM), arbitrage-pricing (APT), consumption capital (CCAPM), Fama-French 3 factor, fundamentalist and chartist and behavioral asset pricing models. The paper concludes that the behavioral asset pricing model appears to provide one of the better approaches to addressing confounding issues particularly when compared to traditional models. The paper includes detailed summary charts.

Table of Contents:
Introduction
Review and Discussion
Evolution of Asset Pricing Theories
Table: Comparison of Asset Pricing Models
Summary and Conclusion

From the Paper:

"These new concepts concerning how "real people" make decisions have fueled the rapidly growing fields of behavioral finance. This emphasis on developing a better understanding of real-world decisions made by real people, then, is the essence of behavioral finance. Therefore, from a behavioral finance perspective, economic theory should not necessarily result in the expectation that financial markets are efficient; to the contrary, significant and systematic fluctuations from efficiency can be reasonably expected to endure for lengthy periods of time."

Sample of Sources Used:

• Adesi, Giovanni Barone, Patrick Gagliardini and Giovanni Urga. (2004). "Testing Asset Pricing Models with Coskewness." Journal of Business & Economic Statistics 22(4): 474.
• Anginer, Deniz, Kenneth L. Fisher and Meir Statman. 2008, February. "Stocks of Admired Companies and Despised Ones." Santa Clara University Leavey School of Business. [Online]. Available: http://business.scu.edu/finance/faculty/statman/articles/fortune 020907.pdf.
• Antia, Murad J. Review of a Behavioral Approach to Asset Pricing, 2005, by Hersh Shefrin, Elsevier Academic Press, Burlington, MA. Financial Analysts Journal.
• Bagliano, Fabio-Cesare and Giuseppe Bertola. Models for Dynamic Macroeconomics. Oxford: Oxford University Press.
• Brunel, Jean L. P. (2007, March). "Is a Behavioral-Finance-Based Allocation Really Suboptimal?" Presentation to the Asset Allocation and Investment Policies for Private Clients conference held in Chicago on November 16, 2006, CFA Institute.

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