Item

Π-CAPM: The classical CAPM with probability weighting and skewed assets

Driessen,Joost
; 
Ebert,Sebastian
; 
Koëter,Joren
Abstract
We propose a new asset pricing model that generalizes the mean-variance framework by including probability weighting, specifically the overweighting of rare, high-impact events. Our model-the $ \Pi $-CAPM-generates several new predictions: (i) skewness has a positive price effect, amplified by volatility; (ii) the price effect of volatility is negative for left-skewed assets but positive for right-skewed assets; and (iii) option-implied variance premiums for stocks have a U-shaped relation to skewness, amplified by volatility. We find strong empirical support for these predictions. Finally, we show that the $ \Pi $-CAPM predicts an exaggerated co-movement of assets and can explain the correlation premium.
Description
Date
2025-07
Journal Title
Journal ISSN
Volume Title
Publisher
Collections
Tilburg University Research Output Collection
Show all metadata
Research Projects
Organizational Units
Journal Issue
Keywords
asset pricing, behavioral finance, probability weighting, option markets, G02 - Behavioral Finance: Underlying Principles, G11 - Portfolio Choice ; Investment Decisions, G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
Citation
Driessen, J, Ebert, S & Koëter, J 2025, 'Π-CAPM: The classical CAPM with probability weighting and skewed assets', Review of Financial Studies. https://doi.org/10.1093/rfs/hhaf045
URI
https://hdl.handle.net/20.500.14602/82596
Embedded videos