An inter-temporal CAPM based on First order Stochastic Dominance

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Abstract

The inter-temporal Capital Asset Pricing Model (CAPM) assumes that investors are risk-averse. However, there is a very large body of empirical and experimental evidence documenting that many investors are not globally risk-averse: Prospect Theory and aspiration-level models are two well-known examples of this literature. This paper employs Stochastic Dominance criteria to generalize the inter-temporal CAPM for all investors with increasing utility functions. Another advantage of the proposed approach is its simplicity: it does not require dynamic programming, and it allows for ambiguous investment horizons.

Original languageAmerican English
Pages (from-to)734-739
Number of pages6
JournalEuropean Journal of Operational Research
Volume298
Issue number2
DOIs
StatePublished - 16 Apr 2022

Bibliographical note

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

  • CAPM
  • Finance
  • Investment horizon
  • Prospect Theory
  • Stochastic Dominance

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