Reverse-Engineering and Real Options–Adjusted CAPM in the Taiwan Stock Market

Abstract

ABSTRACTPrevious studies have addressed many anomalies that violate the capital asset pricing model (CAPM). However, recent studies have employed either the reverse-engineering (RE) approach or the options-adjusted approach to verify the validity of CAPM on the developed stock markets. This study simultaneously employs the two approaches on the Taiwan’s stock market and obtains a consistent result with those on the developed stock markets. Additionally, this study compares the predicting stock return ability among various regression models and anomaly variables. For completeness, the betas of CAPM and Fama–French three factors are adopted from the historical, Vasicek-adjusted, and time-varying conditional betas.