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VOL. 5, ISSUE 2 (2023)

Theoretical and empirical review of asset pricing models: A structural synthesis

Authors

Pooja, Jai Pal Sharma

Abstract

The most important issue in financial economics is the pricing of financial assets, particularly the calculation of the price of a risky financial asset. This study's major goal is to examine asset pricing models' conceptual foundation and explore how security analysis might be affected. A thorough theoretical analysis of asset pricing models is also provided in this work, with a focus on static and dynamic versions that are consistent with the results of the empirical studies. Asset pricing and its implications are a topic that receives a lot of attention in the financial economics literature. The work offers a theoretical derivation of the “capital asset pricing model” (CAPM), a common name for the equilibrium model. This model was created almost simultaneously by Sharpe (1964) and Treynor (1961), and it has since been expanded and clarified by Lintner (1965), Mossin (1966), and Black (1972). Variations in expected return over time are common in securities and logically related to market circumstances. As a result, the static CAPM is converted into the “conditional capital asset pricing model” (CCAPM), a modified version of the “asset-pricing” model. The “arbitrage asset pricing” theory (APT), an alternative equilibrium asset-pricing model, was developed by Ross in 1976.The core ideas behind the arbitrage prong theory are also explored, along with the empirical literature assessment and critical evaluation of the theoretical and empirical models. Additionally, the “Cahart four factor models”, the “Fama French five factor model”, and the “Fama French three factor model” are discussed in this study. The primary objective of an “asset pricing” model is to determine the current value of future rewards or cash flows after taking risk and time lags into account. The challenge with the discounting process is that the important variables that influence payoffs change with time, despite the theoretical framework still being effective for incorporating the changing variables into “asset pricing” models. By offering a thorough analysis of the models and a structural empirical evaluation of the historical stream of empirical studies, this paper addresses a gap in the literature.

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Pages:38-43

How to cite this article:

Pooja, Jai Pal Sharma "Theoretical and empirical review of asset pricing models: A structural synthesis". International Journal of Commerce and Economics, Vol 5, Issue 2, 2023, Pages 38-43

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