Linear beta pricing with efficient/inefficient benchmarks and short-selling restrictions |
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Institution: | 1. Department of Banking and Financial Management University of Piraeus;2. Aston Business School Aston University, United Kingdom;1. United Arab Emirates University, United Arab Emirates;2. Montpellier Business School, France;1. Alfaisal University, Saudi Arabia;2. University of Leicester, UK;3. University of Lincoln, UK;4. University of Manchester, UK |
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Abstract: | We provide two security pricing models that can be used when short sales of risky securities are not permitted. The first model uses a benchmark located on the expected return-standard deviation efficient frontier without short sales and presents security expected returns as a weighted linear function of two betas, one induced by the benchmark and the other adjusting for the short-sale constraints. The second model uses a benchmark that is inefficient relative to the efficient frontier, does not allow short sales, and expresses security returns as a weighted linear function of three betas:one induced by the inefficient benchmark, and the other two adjusting simultaneously for the short-sales restrictions and the benchmark's inefficiency.These results complement the linear pricing models that link expected returns and betas by allowing, for efficient or inefficient expected return-standard deviation, benchmarks with restricted short sales. |
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