The Asset Pricing System

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Modern Economy, 2012, 3, 473-480
http://dx.doi.org/10.4236/me.2012.35062 Published Online September 2012 (http://www.SciRP.org/journal/me)
The Asset Pricing System
Yi-Jang Yu
Department of Economics, Ming Chuan University, Taipei, Chinese Taipei
Email: yjyu@mail.mcu.edu.tw
Received May 5, 2012; revised June 6, 2012; accepted June 15, 2012
ABSTRACT
Mainstream asset pricing models are all inappropriate when they consistently insist on applying one single model to
deal with a reality filled with different aspects of asset pricing. In addition, those models also treat the right environment
variable too lightly hence can not rightly do the job of asset pricing. In this study, based on the portfolio theory and the
principle of supply and demand, a more reasonable asset pricing system including five different models will be sug-
gested to provide a necessary function of automatic price stabilization and to better serve our financial market.
Keywords: Asset Pricing System; Environment Variable; Portfolio Theory; Automatic Price Stabilization
1. Introduction  using only company variables emerged earlier, and the
MM theorem proposed by Miller and Modigliani in 1961
was deemed to be the pioneering study in this field (Chen
and Zhang, 2007 [7]). By contrast, Fama (1981) [8] started
to lay the econometric foundation between asset price
variation and macroeconomic variables including GDP,
monetary supply and other related variables. Not surpris-
ingly, combining both microeconomic and macroeconomic
variables into one econometric model also attracted some
attention (Lev and Thiagarajan, 1993 [9]; Swanson et al.,
2003 [10]). However, when the set of explanatory variables
with the best explanatory power could not be standard-
ized for different individual assets, requiring more weights
to be put on company variables, or asset portfolios, re-
quiring more weights to be attached to macroeconomic
variables, there was no end to the disputes that arose.
As to those asset pricing models constructed with
theoretical foundations, the first category featured the
return aspect and was described by Graham and Dodd in
1934, later becoming the Dividend Discount Model pro-
posed by Gordon and Shapiro in 1956 (Bettman et al.,
2009 [11]). After that, two more kindred products of the
Earnings Capitalization Model and the Residual Income
Valuation Model had also been suggested (Kothari, 2001
[12]). The problem is, as long as all of them have to ap-
ply time series corporate net incomes to forecast the net
income in the next period, they can easily become econo-
metric models (Collins and Kothari, 1989 [13]; Dechow
et al., 1999 [14]). The second category can be classified
as risk evaluation models, and the CAPM is clearly the
most important representative. The scale of its family is
still growing up to these days. While some consistently
oppose it (Fama and French, 1996 [15]; 2004 [16]), some
Since the mainstream asset pricing models can not restrain
themselves from generating price bubbles in the financial
market (Summers, 1985 [1]; Krugman, 2009 [2]; Colan-
der, 2010 [3]), they certainly deserve our closer attention.
In recent years, final conclusions regarding the major
causes of recent financial crises still focus on market con-
straints such as loose controls over financial derivatives
or credit or monetary policies (Kindleberger, 2005 [4];
Askari et al., 2010 [5]; Bresser-Pereira, 2010 [6]). How-
ever, if those mainstream asset pricing models can not be
tamed by nature, then unleashing their constraints would
only further exaggerate their power of sabotage.
Equally important is that, when asset risk and return
can only be endogenously determined and both are of much
concern to investors, clearly it is impossible to apply just
one single model to price assets, not to mention that there
are still other considerations including the separation be-
tween normative and positive analyses needing to be
taken care of. In reality, we have no choice but to apply a
system instead of one single model to manage the job of
asset pricing.
The main tasks of this study are therefore twofold. The
first is to point out that mainstream asset pricing models
are all inappropriate when they consistently insist on
applying one single model to deal with a reality filled
with different aspects of asset pricing. Accordingly, the
second task of this study is to suggest a necessary asset
pricing system which, by its own properties, can provide
a safer ground to serve our financial market.
1.1. Literature Review
Within the econometric approaches to asset pricing, strictly
Copyright (c) 2012 SciRes.  ME

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