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Model Implied Asset Pricing Beliefs: An Empirical Analysis for S&P 500® Constituents from 2010-2020

Currently, only the renderred PDF report is publicly accessible, i.e. "empirical-analysis-of-model-implied-asset-pricing-beliefs.pdf". The underlying dataset and the source code are available upon request. Please email c.satzky@gmail.com for further information.

Abstract

Common investment beliefs result from academic research and conventional wisdom. In this study, I am deriving explicit and implicit investment hypotheses from the Capital Asset Pricing Model (Sharpe, 1964), the Fama and French 5 Factor Model (Fama and French, 1993), and common price multiples. I empirically investigate the credibility of these investment beliefs using data from S&P 500® constituents from January 2010 to December 2020. The significance of each investment hypothesis is assessed by two methods of statistical evaluation. The goal of this research is to provide insights to asset managers in support of well-informed financial decision-making.

The hypotheses under investigation are definied a priori and include the following;

Capital Asset Pricing Model

  • High Beta outperforms low Beta

Fama and French 5 Factor Model

  • Small outperforms Big
  • High Value outperforms low Value
  • Robust Profitability outperforms weak Profitability
  • Conservative Investment outperforms aggressive Investment

Common Price Multiples

  • Low Price-to-Earnings ratio (PE) outperforms high PE
  • Low Price-to-Revenue ratio (PR) outperforms high PR
  • Low Price-to-Cash Flow (PCF) outperforms high PCF

Sharelab Limited Indicator

  • High GrowthSpread® (GS) outperforms low GS