Research On Behavioral Capital Asset Pricing Model Based On LPMs

Risk and its measurement are the core issues for studies in decision making under risk. From theoretical perspective Lower Partial Moments (LPMs) have been widely acknowledged as appropriate measures of risk under reasonable assumptions on a decision maker's risk preference. However, risk is subject to both internal perception and then personal value judgment. Therefore, the empirical question of whether Chinese investors risk perception is really reflected by LPMs needs to be answered. Meanwhile, the most influential models of capical asset pricing are based on variance as risk measure and the number of alternative asset pricing theories based on other risk measures than variance and more realistic assumptions about human behavior is still very small. The main works and findings of this paper are following:1. The experimental study explored the notion of risk and tried to relate different risk conceptions to individual risk perception. The results strongly dismiss variance in favour of LMPs as Chinese individual investor's risk perception. We then specify the target outcome and the weights of the deviations from the target.2. BAPM based on LPMs (LPM-BAPM) is developed, which is more suitable to Chinese investor's risk perception and actual investment decision making process.3. Choosing SSE COMPONENT INDEX as alternative for dynamic volume index (DVI), the empirical comparisons are drawn between CAPM, LPM-CAPM, BAPM and LPM-BAPM. It has been found that behavioral asset pricing is superior to traditional asset pricing, and that asset pricing based on LPMs is more suitble to asset pricing based on variance. Overall, LPM-BAPM is better applied in Chinese exchange.