Research On Capital Asset Pricing Model With Return Extrapolation And Its Application

Under normal circumstances,financial asset prices have the characteristics of mean recovery when they fluctuate in the normal range,which keeps the financial market stable.However,once the asset price changes obviously beyond the normal range,there will be a financial anomaly that continues to rise or fall,especially during the financial asset price bubble,asset price fluctuations obviously exceed the normal range,resulting in irrational fluctuations,leading to excessive prosperity or depression in the financial market,which has a severe negative impact on the economic and even social levels.Neither classical capital asset pricing model nor behavioral capital asset pricing model can reasonably explain the irrational fluctuation of asset prices.The irrational fluctuation of asset prices is not only related to exogenous factors(such as cash flow shocks caused by monetary policy and leveraged trading),but also related to endogenous factors,such as investors’ speculative behavior and their empirical behavior.Among them,investors’ income extrapolation behavior is a typical endogenous factor that leads to irrational fluctuation of asset prices,especially when asset prices fluctuate sharply.Therefore,assuming that investors have the characteristics of income extrapolation,we extrapolate their expected income in the next period based on the income of each period in the asset history,and construct a new capital asset pricing model with investors’ income extrapolation behavior,revealing the pricing ability of income extrapolation behavior and explaining the irrational fluctuation phenomenon of asset prices that continue to rise or fall.Taking the monthly earnings data of Shanghai and Shenzhen A-shares from 2000 to2021 as samples,this paper makes an empirical study to reveal the asset pricing ability of investors’ earnings extrapolation behavior and explain the irrational fluctuation phenomenon of asset prices.In the form of comparison,extrapolation factors are constructed under different groups and weights to test the robustness of the model;Finally,based on the out-of-sample data and the explanatory ability of the model,the validity of the model is tested in the form of comparison.Stock mispricing is a common price anomaly in the inefficient capital market,and its formation is influenced by many factors inside and outside the enterprise.The existing literature mainly focuses on the fundamental factors of the enterprise and external macro factors,and seldom considers the influence of irrational factors such as investor behavior and decision-making.With the development of behavioral finance theory,behavioral finance also puts forward different explanations for the reasons of mispricing,pointing out that the irrational behavior deviation of investors is one of the important reasons leading to mispricing of stocks.Especially during the financial crisis,the stock price experienced a sharp rise and fall in a short period of time,and the sharp price fluctuation was beyond the explanation of traditional asset pricing theory.Neither the fundamental factors of enterprises nor macroeconomic factors could reasonably explain the internal mechanism of the sharp price fluctuation,while behavioral finance believed that investor sentiment and its behavior played a role in fueling the market volatility.Therefore,taking the stock data of listed companies in Shanghai and Shen Zhen A-shares from 2000 to 2021 as samples,this paper studies the relationship between investors’ earnings extrapolation behavior and stock mispricing,and further discusses the differences in the influence of investors’ earnings extrapolation behavior on stock mispricing in different degrees and the moderating effect of economic state.Through modeling and empirical analysis,this paper draws the following conclusions:(1)Investors’ income extrapolation generally affects asset pricing,and its pricing ability is related to the fluctuation of asset prices;(2)When the asset price fluctuates strongly,the income extrapolation has a boosting function,which pushes the asset price to rise or fall continuously,leading to irrational fluctuations in asset prices and excessive prosperity or depression in the stock market;When the asset price fluctuates weakly,the income extrapolation has the function of restraining,promoting the asset price to return to the historical price,keeping the asset price stable and maintaining the stable development of the stock market;(3)investors’ moderate income extrapolation is more helpful to asset price discovery and effectively reduces asset pricing deviation;(4)Extrapolation of investors’ returns leads to mispricing of stocks,which is more likely to lead to overvaluation than undervaluation of stocks;(5)There are obvious differences in the influence of investors’ earnings extrapolation behavior on the degree of stock mispricing under different empowerment.The higher the empowerment,the higher the degree of stock mispricing,that is,investors’ excessive earnings extrapolation will aggravate the degree of stock mispricing;(6)The economic state also has a significant influence on the relationship between investors’ earnings extrapolation and stock mispricing.In the economic upswing,investors’ earnings extrapolation is more likely to push up the stock price,resulting in overvaluation of the stock price.