The Popularity Asset Pricing Model

Abstract

Fama and French identify ‘disagreement’ and ‘tastes’ as impacting asset prices in an equilibrium Capital Asset Pricing Model (CAPM) framework, stopping short of an actual model. The Arbitrage Pricing Theory (APT) of Ross posits a linear multi-factor structure of returns priced through arbitrage. The Popularity Asset Pricing Model (PAPM) generalizes the CAPM in a linear equilibrium structure allowing for disagreement and tastes. The PAPM subsumes the CAPM and a range of newer ESG-specific models as special cases. In the PAPM, investors have divergent beliefs about expected returns, and a variety of risk and non-risk preferences, such as liquidity or ESG.

Keywords: popularity, asset pricing theory, CAPM, heterogeneous expectations/ disagreement, preferences / tastes, behavioral finance

JEL Classification: D62, G11, G12, G14, G23, G34, G4, M14, Q01, Q5