Asset Pricing Models? - A Different Approach!

Abstract

The reality of contemporary developments in the capital markets indicates that they do not lend themselves to the deductive theory based on simplified rationality of the physical world. The behaviour of the markets cannot be derived from rather bare postulates of the so called random walk process and the normal distribution of investments´ returns. It in fact relates to a variety of different, even behavioural factors. The risk - return relationship is not therefore stable over time and investors cannot rely on the comforting message that all you need to do in order to obtain an expected return is only to decide the appropriate level of risk. There are therefore serious doubts about the Efficient Market Hypothesis with its e.g. CAPM and B&S option model frameworks. The multifractal view of the market behaviour has inspired the outline of the Volatility Asset Pricing Model (VAPM) based on the market's expected volatility and the serial dependence on the past return' s performance, both reflecting the total market risk of an investment. In view of a further research this model has been so far succesfully tested as well as presented.