Explain what’s wrong with the following logic to construct multifactor asset pricing models. Start with a simple asset pricing model, e.g. CAPM Consider which patterns are explained by it and which are left unexplained. If some firm characteristic “X” is unexplained, construct and include a new factor on the basis of this characteristic. By definition your new model (with new factor would explain “X”) Repeat steps 2 and 3 until all/most important anomalies are accounted for
Explain what’s wrong with the following logic to construct multifactor asset pricing models. Start with a simple asset pricing model, e.g. CAPM Consider which patterns are explained by it and which are left unexplained. If some firm characteristic “X” is unexplained, construct and include a new factor on the basis of this characteristic. By definition your new model (with new factor would explain “X”) Repeat steps 2 and 3 until all/most important anomalies are accounted for
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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- Explain what’s wrong with the following logic to construct multifactor asset pricing models.
- Start with a simple asset pricing model, e.g. CAPM
- Consider which patterns are explained by it and which are left unexplained.
- If some firm characteristic “X” is unexplained, construct and include a new factor on the basis of this characteristic.
- By definition your new model (with new factor would explain “X”)
- Repeat steps 2 and 3 until all/most important anomalies are accounted for
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