CAPM with various utility functions: Theoretical developments and application to international data

This paper presents an extension of the Capital Assets Pricing Model (hereafter CAPM) where various utility functions are applied. Specifically, we propose an overall CAPM beta that accounts for the higher order moments and reflects the investor preferences and attitudes toward risk. We particularly...

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Main Authors: Rihab Bedoui, Houda BenMabrouk
Format: Article
Language:English
Published: Taylor & Francis Group 2017-01-01
Series:Cogent Economics & Finance
Subjects:
Online Access:http://dx.doi.org/10.1080/23322039.2017.1343230
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spelling doaj-e7267af593ea4973a6f76e4e3ee028392021-02-18T13:53:23ZengTaylor & Francis GroupCogent Economics & Finance2332-20392017-01-015110.1080/23322039.2017.13432301343230CAPM with various utility functions: Theoretical developments and application to international dataRihab Bedoui0Houda BenMabrouk1LaREMFiQ, Laboratory of Research on Economis, Management and Quantitative Finance, LaREMFiQ, Laboratory of Research on Economis, Management and Quantitative Finance, This paper presents an extension of the Capital Assets Pricing Model (hereafter CAPM) where various utility functions are applied. Specifically, we propose an overall CAPM beta that accounts for the higher order moments and reflects the investor preferences and attitudes toward risk. We particularly develop CAPM betas for different classes of utility function: the negative exponential utility function, power utility function or “Constant Relative Risk Aversion (CRRA) Utilities” and hyperbolic utility function or “HARA Utilities” (hyperbolic absolute risk aversion). In order to validate our theoretical results, we analyze the impact of investors’ preferences on the valuation equation. Applying the International CAPM, the results indicate that our utilities-based betas differ largely from the traditional CAPM betas. Moreover, the results confirm the importance of higher order moments on the pricing equation. Finally, the results both empirically and theoretically post to the consistent effect of the risk aversion degree on our utilities-based CAPM.http://dx.doi.org/10.1080/23322039.2017.1343230truncated taylor approximationnegative exponential utility functionpower utility functionhyperbolic utility functionrisk measureassets pricinginternational capm
collection DOAJ
language English
format Article
sources DOAJ
author Rihab Bedoui
Houda BenMabrouk
spellingShingle Rihab Bedoui
Houda BenMabrouk
CAPM with various utility functions: Theoretical developments and application to international data
Cogent Economics & Finance
truncated taylor approximation
negative exponential utility function
power utility function
hyperbolic utility function
risk measure
assets pricing
international capm
author_facet Rihab Bedoui
Houda BenMabrouk
author_sort Rihab Bedoui
title CAPM with various utility functions: Theoretical developments and application to international data
title_short CAPM with various utility functions: Theoretical developments and application to international data
title_full CAPM with various utility functions: Theoretical developments and application to international data
title_fullStr CAPM with various utility functions: Theoretical developments and application to international data
title_full_unstemmed CAPM with various utility functions: Theoretical developments and application to international data
title_sort capm with various utility functions: theoretical developments and application to international data
publisher Taylor & Francis Group
series Cogent Economics & Finance
issn 2332-2039
publishDate 2017-01-01
description This paper presents an extension of the Capital Assets Pricing Model (hereafter CAPM) where various utility functions are applied. Specifically, we propose an overall CAPM beta that accounts for the higher order moments and reflects the investor preferences and attitudes toward risk. We particularly develop CAPM betas for different classes of utility function: the negative exponential utility function, power utility function or “Constant Relative Risk Aversion (CRRA) Utilities” and hyperbolic utility function or “HARA Utilities” (hyperbolic absolute risk aversion). In order to validate our theoretical results, we analyze the impact of investors’ preferences on the valuation equation. Applying the International CAPM, the results indicate that our utilities-based betas differ largely from the traditional CAPM betas. Moreover, the results confirm the importance of higher order moments on the pricing equation. Finally, the results both empirically and theoretically post to the consistent effect of the risk aversion degree on our utilities-based CAPM.
topic truncated taylor approximation
negative exponential utility function
power utility function
hyperbolic utility function
risk measure
assets pricing
international capm
url http://dx.doi.org/10.1080/23322039.2017.1343230
work_keys_str_mv AT rihabbedoui capmwithvariousutilityfunctionstheoreticaldevelopmentsandapplicationtointernationaldata
AT houdabenmabrouk capmwithvariousutilityfunctionstheoreticaldevelopmentsandapplicationtointernationaldata
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