A Study Of The Development Of Asset Pricing Theory

The publish of Portfolio Selection(Modern Portfolio Theory, MPT) (Markowitz,1952) indicates the birth of the modern finance theory. The asset pricing theory has developed from standard finance stage to behavior finance stage. Standard finance supposes that investors are fully rational and market is efficient. Rationality includes two things: one is belief, which means investors update their beliefs according to Bayes' law; the other is preference, which means investors, given their beliefs, make choices consistent with Savage's Subjective Expected Utility(SEU). On the basis of rationality and EMH, standard finance has formed many fine pricing models. But, subsequently, economists find many anomalies which cannot be explained by the standard finance. The behavioral asset pricing theory analyses investors' belief and preference, and indicates investors aren't fully rational, they depart from Bayes'law or deviate from SEU. Behavior theory explains these financial anomalies, which also push the development of the theory itself.As a survey of asset pricing theory, this paper analyzes the development of asset pricing theory from belief and preference. At the same time, this paper also analyzes the differences between standard finance and behavior finance in explaining the anomalies.This paper has four chapters. Chapter one analyzes the partial and general equilibrium theory of asset pricing, which includes MPT,CAPM,APT and CCAPM. This chapter constitutes the standard finance. Chapter two analyzes the real price behavior which can not be explained by the standard finance. We call these anomalies. Chapter three surveys the behavior finance including the limits to arbitrage and psychology. The last chapter analyses the behavioral asset pricing theory, which includes beliefs preference and sentiment models. After analysis, I think the behavior finance is the supplement of standard finance, and behavior are the necessary factor in analyzing asset pricing.