Theoretical and Empirical Review of Asset Pricing Models

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International Journal of Economics and Financial Issues Vol. 2, No. 2, 2012, pp.141-178 ISSN: 2146-4138 www.econjournals.com

Theoretical and Empirical Review of Asset Pricing Models: A Structural Synthesis Şaban Çelik Deparment of International Trade and Finance, Yasar University, Izmir, Turkey. Tel: +90-232-4115343; Fax: +90-232-4115020. E-mail: saban.celik@yasar.edu.tr

ABSTRACT: The purpose of this paper is to give a comprehensive theoretical review devoted to asset pricing models by emphasizing static and dynamic versions in the line with their empirical investigations. A considerable amount of financial economics literature devoted to the concept of asset pricing and their implications. The main task of asset pricing model can be seen as the way to evaluate the present value of the pay offs or cash flows discounted for risk and time lags. The difficulty coming from discounting process is that the relevant factors that affect the pay offs vary through the time whereas the theoretical framework is still useful to incorporate the changing factors into an asset pricing models. This paper fills the gap in literature by giving a comprehensive review of the models and evaluating the historical stream of empirical investigations in the form of structural empirical review. Keywords: Financial economics; Asset pricing; Static CAPM; Dynamic CAPM; Structural empirical review JEL Classifications: G00; G12; G13

1. Introduction In order to simplify the concept of asset pricing, it needs to give a snapshot of the literature and a brief overview of perspectives in the field in addition with to describe what it is meant by an asset. The assets, financial or nonfinancial, will be defined as generating risky future pay offs distributed over time. Pricing of an asset can be seen as the present value of the pay offs or cash flows discounted for risk and time lags. However, the difficulties coming from discounting process is to determine the relevant factors that affect...
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