Abstract
I propose a Capital Asset Pricing Model in which investor demand exhibits a speculative component. In equilibrium, investors' optimal trade-off between diversification and speculation generates predictable patterns for stocks with extreme book-to-market ratios. Using data on U.S. stocks, I find evidence consistent with the model predictions. I show that the value premium varies with investors’ propensity to speculate, and therefore includes a substantial behavioral component. Overall, the findings shed new light on the role of dichotomous risk-preferences in asset pricing.
Original language | English |
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Article number | 100834 |
Pages (from-to) | 1-17 |
Number of pages | 17 |
Journal | Journal of Behavioral and Experimental Finance |
Volume | 39 |
DOIs | |
Publication status | Published - Sept 2023 |
Bibliographical note
Publisher Copyright:© 2023 The Author(s)
Keywords
- Beta
- Business cycle
- Speculative demand
- Value premium