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Behavioral Asset Pricing Theory And Empirical Research

Posted on:2006-08-04Degree:MasterType:Thesis
Country:ChinaCandidate:Y GouFull Text:PDF
GTID:2206360152985863Subject:Finance
Abstract/Summary:PDF Full Text Request
1. Main contents Section one gives a brief review of CAPM and it's theoretical foundation—Efficient Market Hypothesis, focusing on their common premises—rational investor to give convenience to the subsequent modification and development of this premise by using behavioral finance theory. Although CAPM was developed before EMH, from the theoretical view, EMH is the foundation of CAPM, so EMH is introduced first. Furthermore,if EMH can not be justified, so is CAPM, and it isn't strange there are many abnormal phenomena that can not be explained by CAPM. Section two briefly introduces behavioral finance theory, analyzing it's doubts and challenges to CAPM. Since there are more criticism to EMH than straightly to CAPM by behavioral finance, this section deeply analyzes the reasons why the market is inefficient, and the characteristics and mutual effecting mechanism, which are also ignored by CAPM. And the key is that these ignored ingredients might be the driving forces behind the fluctuation of financial assets' prices and returns. Meanwhile,this section also tries to combine the two theoretical building blocks—limits to arbitrage and investor sentiment to infer the systematic influence by the irrational behavior of individual investors to the market. Section three describes the two ways to modify and extend CAPM, one is Fama-French three factors model and it's expansion of behavioral factors, the logic is to attribute those phenomena that can not be explained by CAPM to corresponding factors that influence assets' prices.; another way is based on noise trading theory by inducting the influence noise traders do to asset prices and adding it into the frame of asset pricing theory as a kind of risk. In section four, the author makes an empirical study of CAPM and BAPM by using the trading data of Chinese stock market .Based on the method developed by foreign scholars, the author tries to modify their method and make some innovations according to my theoretical study. Then, combining the results of empirical study and the realistical status of Chinese stock market, the author gives some explanations. Section five summarizes the main conclusions of this dissertation and gives a brief comment on the behavioral asset pricing theory and some views of further study. 2.Main Conclusions (1) Investors' rationality is the prerequisite of EMH; CAPM uses "representative investor" to average those market participators with different characteristics and supposes every individual investor makes decision independently, and doesn't consider t differences and mutual effection of investors. Modern finance theory assumes that investors are rational and homogeneous. Behavioral finance theory criticizes these premises unrealizable and holds the view that there are different kinds of investors in financial market and some of them are irrational. (2) This dissertation tries to logically combine the two theoretical building blocks—limits to arbitrage and investor sentiment, and points out that if letting "noise trading" to represent investor's irrational behavior, we can use noise traders risk to describe the systematic influence by the irrational behavior of individual investors to the market. (3) This dissertation analyses the two types of behavioral asset pricing models: i. The flaw of Multi-factor model is that it just uses various factors to measure the influence led by abnormal returns but not explain how these factors induced by investor's behavior by an unifiedtheory. ii. The greatest achievement of BAPM is to induct noise traders risk into the asset pricing model, but it still can not explain the sources of market portfolio return and risk-free return, and maybe it's better to use it to measure the noise trader risk in the markets. (4) The empirical study of this dissertation shows that the noise traders risk in Chinese stock market is obviously high and it attribute to the following reasons: i. The government has intervened the stock market too much. ii. The ratio of noise trader is too high in Chinese sto...
Keywords/Search Tags:Behavioral finance, Asset pricing, Investor behavior, Efficent market
PDF Full Text Request
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