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SP 1987-04The Capital Asset Pricing Model with Non-homogenous Expectations: Theory and Evidence on Systematic Risks to the Beta
Francisco, Clodualdo

This paper introduces the concept of non-homogeneity of expectations (NHE) among investors on the parameters of the probability distribution of assets' rates of return and derives a non-linear equilibrium return-risk relationship. This relationship shows a new and additional form of risk called theta risks I and II which are the systematic biases to the beta risk arising from NHE among investors on the mean and variance respectively of the rates of return. Under the traditional homogenous expectations assumption, or if the theta risks vanish, the CAPM of Sharpe and Lintner is a special case. Using an error-in-variable model to provide an indirect test and explaining the result within the framework of the model, analysis indicates that the empirical anomaly on the CAPM are due to the attempts to fit a linear model to a fundamentally non-linear return-risk relationship.

keywords:financial market, financial sector, financial system, econometric modeling
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Staff Papers Title
TC-PIDS SP 1987-02Background Paper for the Workshop on the "Impact Effects of Export Taxes Tariff Commission
TC-PIDS SP 1987-01A Documentation of Import Licensing Procedures
SP 1987-05The Structure of Rural Household Income and its Implications on Rural Poverty in Bicol, Philippines
SP 1987-04The Capital Asset Pricing Model with Non-homogenous Expectations: Theory and Evidence on Systematic Risks to the Beta
SP 1987-03Residential Demand for Electricity and Pricing Policy Implications in a Developing Economy: The Philippine Case
SP 1987-02Rural Financial Markets: A Review of Literature
SP 1987-01Revenue Performance of National Government Taxes, 1975-1985
		
		
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