Chapter 1

An Introduction to Asset Pricing Models

Abstract

This chapter provides a brief overview of asset pricing models, with an emphasis on those models that are widely used to describe the returns of traded financial securities. Here, we focus on various models of stock returns and fixed-income returns, and discuss the reasoning and assumptions that underlie the structure of each of these models.

Keywords

Asset Pricing Models, CAPM, Factor Models, Fama French three-factor model, Carhart four-factor model, DGTW stock characteristics model, Estimating beta,Expected return and risk.

1.1 Historical Asset Pricing Models

Individuals are born with a sense of the perils of risk, and they develop mental adjustments to penalize opportunities that involve ...

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