Modeling Asset Pricing Using Behavioral variables; Fama-Macbeth Approach

Abstract

Investors generally make decisions based on risk and stock returns and their decision are influenced by two factors: macroeconomic variables and microeconomic variables. The behavioral factors affecting investment decisions are investigated in the area of behavioral finance. In other words, behavioral finance focuses on specific human behavior attributes and their utilization in asset pricing. Behavioral asset pricing is the result of applying behavioral finance theories within traditional asset pricing theories. In spite of many asset pricing models, due to their weaknesses and incompleteness as well as the necessity to investigate behavioral factors, this study attempts to model asset pricing using behavioral models. The population of the study includes all listed firms in Tehran Stock Exchange over the years 2008 to 2018 and the sample is selected through systematic elimination of the population. Given these conditions, 141 firms are selected as the sample. It is worth mentioning that the hypotheses are tested by designing multivariate regression models. The results show that using FamaMacbeth approach, accounting information risk; investors’ trading behavior and investors' sentiments have a significant and direct impact on firms’ stock returns. Thus, it is argued that behavioral variables can play a significant role in Modeling Asset Pricing.