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The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha” by Alex R. Horenstein explores how academic research can impact asset returns.

The paper finds that assets with low realized CAPM Alphas outperform those with high ones, but this finding only appears after the CAPM’s publication in the 1960s.

The paper provides evidence consistent with the widespread application of the CAPM model generating incentives to tilt portfolios systematically away from low CAPM Alpha assets, causing such assets to be undervalued.

Abstract Of Paper

This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM Alphas outperform those with high ones, but this finding only appears after the CAPM’s publication in the 1960s. I find evidence consistent with the widespread application of the CAPM model generating incentives to tilt portfolios systematically away from low CAPM Alpha assets, causing such assets to be undervalued.

Original paper – Download PDF

This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM Alphas outperform those with high ones, but this finding only appears after the CAPM’s publication in the 1960s. I find evidence consistent with the widespread application of the CAPM model generating incentives to tilt portfolios systematically away from low CAPM Alpha assets, causing such assets to be undervalued.

Author

Alex R. Horenstein
University of Miami – School of Business Administration – Department of Economics

Conclusion

The paper “The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha” by Alex R. Horenstein concludes that the widespread application of the CAPM model generates incentives to tilt portfolios systematically away from low CAPM Alpha assets, causing such assets to be undervalued.

The paper finds that assets with low realized CAPM Alphas outperform those with high ones, but this finding only appears after the CAPM’s publication in the 1960s.

The paper provides evidence consistent with the channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research.

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FAQ

What is the main finding of the paper “The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha”?

The main finding of the paper is that assets with low realized Capital Asset Pricing Model (CAPM) Alphas outperform those with high ones. However, this relationship emerges specifically after the publication of the CAPM in the 1960s.

How does the paper explain the observed outperformance of assets with low CAPM Alphas?

The paper suggests that the widespread application of the CAPM model, following its publication, creates incentives for investors to systematically tilt portfolios away from assets with low CAPM Alphas. This systematic portfolio adjustment, driven by the application of the CAPM model, leads to the undervaluation of assets with low CAPM Alphas, contributing to their subsequent outperformance.

What is the significance of the paper’s findings in relation to academic research and asset pricing?

The findings highlight a potential unintended impact of academic research on asset returns. Specifically, the paper suggests that the application of academic models, such as the CAPM, by investors can influence their portfolio decisions, leading to systematic undervaluation or overvaluation of certain assets, which, in turn, affects their subsequent performance.

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