CAPM assumes that time horizon of investors is same and they, having discounted future cash flow by the same discount rate (expected return); reach the same intrinsic price for stocks. I am interested in knowing what happens if this assumptions be relaxed. Does, in this situation the expected return of different investors differs? How equilibrium price of stocks is determined in a competitive and efficient market if it be the case (i.e. different investors have different expected return due)?
I suggest you to read my paper: "Theoretical and empirical approaches to estimating the social discount rate. An estimation for Italy through the Ramsey Formula"
Dear Prof. Kalantari,
We agree with the observations made. In my mind the CAPM although it has behavioural microfoundations (like S.K.Mallick's coauthored paper on Mathematical Statistical Pricing on this website) is actually a statistical model based on the efficient frontier computations by its tangency with the line representing portfolio weights. This has nothing to do with investor time horizons except in so far as in calculating the efficient frontier of correlated returns expected returns are taken into account. But the method of that computation is statistically very clear. You may want to revise the Fama Miller Finance Theory textbook. However, expectations do matter that point is very much true.
SKM, NH, SM
Yes, it is different. For long-term investment, you must consider logarithmic return rather than arithmetic return, and CAPM holds only for arithmetic return.
The paper is the first attempt to estimate systematic risk ‘beta’ at different time scales in the context of the emerging Gulf Cooperation Council (GCC) equity markets by applying a relatively new approach in finance known as wavelet analysis. Our results indicate that on average beta coefficients in all GCC countries show a multiscale tendency. This is consistent with our theoretical expectation that stock market investors have different time horizons due to different trading strategies and that is also reflective of the characteristics of the GCC markets in particular in that they are less developed, less liquid, involve more transaction costs, highly dependent on individual investors, and prone to infrequent trading. Further, we analyze the impact of different time scales on Value at Risk (VaR) and find that VaR measured at different time scales suggests that risk tends to be concentrated more at the higher frequencies (lower time scales) of the data. The results are plausible and intuitive and have strong policy implications.
http://www.sciencedirect.com/science/article/pii/S105752190900074X
Try another model research, because you want to explore the private investor expected return.
Maybe prospect theory can use to solve your problem, and you can tray experiment model to explore.
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