January 2015
Article
Journal of Financial Economics

X-CAPM: An Extrapolative Capital Asset Pricing Model

By: Nicholas Barberis, Robin Greenwood, Lawrence Jin and Andrei Shleifer

Format:Print

Abstract

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns; importantly, however, it is also consistent with the survey evidence on investor expectations.

Keywords

Capital Asset Pricing; Returns; Investing; Asset Pricing; Investment Return

Citation

Barberis, Nicholas, Robin Greenwood, Lawrence Jin, and Andrei Shleifer. "X-CAPM: An Extrapolative Capital Asset Pricing Model." Journal of Financial Economics 115, no. 1 (January 2015): 1–24.