Abstract. I propose a Capital Asset Pricing Model in which investor demand exhibits a speculative component. In equilibrium, investors' optimal trade-off between diversification and speculation generates predictable patterns for stocks with extreme book-to-market ratios. Using data on U.S. stocks, I find evidence consistent with the model predictions. I show that the value premium varies with investors’ propensity to speculate, and therefore includes a substantial behavioral component. Overall, the findings shed new light on the role of dichotomous risk-preferences in asset pricing.
Manuscript. You can download the paper here.
Presentations. The Behavioral Finance Working Group Conference at Queen Mary University of London, the International Finance and Banking Society Meetings at Universitat Autònoma de Barcelona, the Forum for Economists International, the Erasmus School of Economics, the University of Cassino and Southern Lazio, the Center for Studies in Economics and Finance, the London School of Economics, the University of Miami, and Indiana University.
Publication. Journal of Behavioral and Experimental Finance, Volume 39, September 2023, 100834, DOI: https://doi.org/10.1016/j.jbef.2023.100834.