Modeling Asset Pricing Using Behavioral Variables: Fama-Macbeth Approach

Investors generally make decisions based on risk and stock returns, and their decisions are influenced by two factors, namely macroeconomic variables and microeconomic variables. The behavioral factors affecting investment decisions are investigated in the area of behavioral finance. In other words, behavioral finance focuses on specific human behavior attributes and their utilization in asset pricing. Behavioral asset pricing is the result of applying behavioral finance theories within traditional asset pricing theories. Although there are many asset-pricing models, due to their weaknesses and incompleteness as well as the necessity of investigating behavioral factors, this study attempted to model asset pricing using behavioral models.The population of the study included all listed firms in Tehran Stock Exchange over the years 2008 to 2018, and the sample was selected through systematic elimination of the population. Given these conditions, 141 firms were selected as the sample. The hypotheses were then tested by designing multivariate regression models.The results showed that using Fama-Macbeth approach, accounting information risk, investors’ trading behavior, and investors sentiments had a significant and direct impact on firms’ stock returns.Thus, it is argued that behavioral variables can play a significant role in Modeling Asset Pricing.