Roger Ibbotson, Yale University
Thomas Idzorek, Morningstar
Paul Kaplan, Morningstar
ABSTRACT: In “Disagreement, Tastes, and Asset Prices,” Fama and French argue that the assumptions of standard asset pricing models, such as the Capital Asset Pricing Model (CAPM), are unrealistic and that both ‘disagreement’ and ‘tastes’ affect asset pricing. The Popularity Asset Pricing Model (PAPM) is a generalized equilibrium model that builds on the familiar CAPM but relaxes these two unrealistic assumptions, not only subsuming the CAPM but a range of newer ESG asset pricing models. In the PAPM, investors have heterogeneous expectations (disagreement) about expected security returns, and a variety of risk and non-risk preferences (tastes), such as tastes for ESG; and thus, the PAPM takes two major steps toward asset pricing in the real world.