Work

CAPM and Skewness Pricing Under Probability Weighting: Based on the Generalised Wang Transform

Year: 2025

Type: article

Abstract: ABSTRACT In this paper, we examine the conditions under which the capital asset pricing model (CAPM) holds with heterogeneous probability weighting. Using the generalised Wang transform within rank‐dependent expected utility, we show that CAPM holds for heterogeneous risk‐averse investors, while the security market line theorem (SMLT) applies to heterogeneous loss‐averse investors. However, CAPM under loss aversion requires homogeneous investors. Revisiting skewness pricing, we find that probability weighting, rather than the S‐shaped value function, drives skewness overpricing. The preference for skewed assets stems from the high distorted mean under probability weighting.

Source: International Journal of Finance & Economics

DOI: 10.1002/ijfe.3148

Authors: Jianchun Sun, Lunyi Wang, Yanyi Wang, Shunming Zhang

Institutions: Renmin University of China, Beihang University, National University of Ireland, Maynooth

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: National Natural Science Foundation of China, National Key Research and Development Program of China

Awards: G5425002687, G5598861580, G7244615352, G8465292469