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Friday, September 2, 2011

CAPM and Ouija Board

How am I going to use the CAPM now?

Gillian Tett from the Financial Times rightfully argues that we have arrived to a world without a risk-free rate. Yes, no rf. In fact she points to Credit Default Swaps being more expensive to the US government than 70 American companies. It is not an issue where to find rf, but whether if it is relevant. Does rf exist? We may come to the conclusion that there no such thing as rf. To make things more complicated, another pivotal assumption in the field: market efficiency has a shrinking following.  

It is time for academia to rethink its teaching of finance. Personally I will have a hard time teaching the CAPM this year.

Adieu CAPM, welcome the Ouija board

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