Definition of Asset Pricing Models

Definition: Asset pricing models are a way of mapping from abstract states of the world into the prices of financial assets like stocks and bonds. The prices are always conceived of as endogenous; that is, the states of the world cause them, not the other way around, in an asset pricing model.

Several general types are discussed in the research literature. The CAPM is one, distinguished from three that Fama (1991) identifies: (a) the Sharpe-Lintner-Black class of models, (b) the multifactor models like the APT of Ross (1976), and (c) the consumption based models such as Lucas (1978).

An asset pricing model might or might not include the possibility of fads or bubbles.(Econterms)

Terms related to Asset Pricing Models:

• CAPM
• APT
• Fads
• Bubbles

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