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Sun, Jianchun, Wang, Lunyi, Wang, Yanyi and Zhang, Shunming (2025) CAPM and Skewness Pricing Under Probability Weighting: Based on the Generalised Wang Transform. International Journal of Finance & Economics. ISSN 1076-9307
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Int J Fin Econ - 2025 - Sun - CAPM and Skewness Pricing Under Probability Weighting Based on the Generalised Wang.pdf
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Abstract
In this paper, we examine the conditions under which the capital asset pricing model (CAPM) holds with heterogeneous probability weighting. Using the generalised Wang transform within rank‐dependent expected utility, we show that CAPM holds for heterogeneous risk‐averse investors, while the security market line theorem (SMLT) applies to heterogeneous loss‐averse investors. However, CAPM under loss aversion requires homogeneous investors. Revisiting skewness pricing, we find that probability weighting, rather than the S‐shaped value function, drives skewness overpricing. The preference for skewed assets stems from the high distorted mean under probability weighting.
| Item Type: | Article |
|---|---|
| Keywords: | CAPM; generalised Wang transform; probability weighting; skewness pricing; SMLT; |
| Academic Unit: | Faculty of Social Sciences > School of Business |
| Item ID: | 20659 |
| Identification Number: | 10.1002/ijfe.3148 |
| Depositing User: | Yanyi Wang |
| Date Deposited: | 09 Oct 2025 09:20 |
| Journal or Publication Title: | International Journal of Finance & Economics |
| Publisher: | Wiley |
| Refereed: | Yes |
| Related URLs: | |
| URI: | https://mural.maynoothuniversity.ie/id/eprint/20659 |
| Use Licence: | This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here |
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