The Popularity Asset Pricing Model

Abstract

In “Disagreement, Tastes, and Asset Prices,” Fama and French argue that the assumptions of standard asset pricing models, such as the Capital Asset Pricing Model (CAPM), are unrealistic and that both ‘disagreement’ and ‘tastes’ can affect asset pricing. The Popularity Asset Pricing Model (PAPM) builds on the familiar CAPM but relaxes these two key unrealistic CAPM assumptions. In the PAPM, investors have heterogeneous expectations (disagreement) about expected security returns, and can have risk and non-risk preferences / tastes. By allowing for diverse investor forecasts and incorporating multiple investor preferences / tastes, the PAPM takes two major steps towards asset pricing in the real world. The PAPM is nevertheless simple and intuitive, serving as a general umbrella model encompassing not only the CAPM as a special case, but also many other classical and behavioral asset pricing models.