A Capital Asset Pricing Model Based on Theory’s Q and Salience Theory

【Authors】

LIN Shiwei, SUN Yihan & NIU Xiaojian

【WorkUnit】

LIN Shiwei（Nanjing Audit University Jinshen College, 210023）；SUN Yihan（Nanjing University of Finance and Economics, 210023）；NIU Xiaojian （Fudan University, 200433）

【Abstract】

Traditional asset pricing models emphasize value investing based on rational expectations, focusing on fundamentals such as profitability and investment, but often overlook behavioral forces, such as gambling preferences, which are particularly salient in emerging markets. This limitation weakens their explanatory power in environments where fundamental valuation coexists with speculative trading. To address this gap, we propose an Integrated Capital Asset Pricing Model based on Q Theory and Salience Theory （ST-ICAPM）, which incorporates four key factors—profitability, growth, investment, and salience—to jointly capture intrinsic value and behavioral distortions. The model is especially relevant to China’s A-share market, where government-endorsed value investing coexists with a prevailing gambling mentality among investors. This highlights the need for a framework that integrates both fundamental and behavioral pricing forces. Fostering a value-oriented investment environment requires not only macro-level policy guidance but also pricing mechanisms like the ST-ICAPM, which can reinforce the foundation of value investing, mitigate gambling preferences, and support long-term market stability.
Empirical evidence shows that the ST-ICAPM significantly outperforms traditional factor models in pricing accuracy. On the fundamental side, profitability and growth factors exhibit robust positive risk premia, reflecting investor expectations driven by both current earnings and future growth prospects. On the behavioral side, the salience factor predicts negative future returns, highlighting the influence of lottery-like trading and improving the explanatory power of pricing models by accounting for sentiment-driven mispricing. Mechanism analysis further reveals that gambling-related behavior is highly sensitive to market sentiment, as mispricing is more likely to occur in loss-making and high-growth stocks during periods of investor optimism, whereas value stocks tend to exhibit resilience during more subdued market conditions. Overall, the ST-ICAPM offers a coherent framework that captures fundamental valuation and behavioral distortions, providing a more comprehensive approach to asset pricing in emerging markets.
This paper makes three core contributions. Theoretically, it integrates rational investment principles from Q theory with behavioral insights from salience theory, bridging the gap between traditional asset pricing and behavioral finance. Empirically, it provides strong evidence for incorporating gambling behavior into asset pricing, uncovering key market features and mechanisms often overlooked by standard models. From a policy perspective, the ST-ICAPM offers actionable guidance for fostering long-term, value-oriented investment while discouraging gambling activity, helping to create a market environment anchored in value investing.
Future research may incorporate value-based fundamentals and behavior-driven distortions in a unified asset pricing framework grounded in production networks and conceptual linkages. On the fundamental side, particular attention should be paid to how productivity spillovers and industrial connections shape expected returns, which is critical for incentivizing capital allocation in emerging markets. On the behavioral side, narratives, media signals, and collective attention may generate short-term mispricing disconnected from fundamentals. A forward-looking agenda must address both forces to enhance return predictability and advance the asset pricing theory.

JEL: G11, G12, G14

【KeyWords】

Value Investing, Asset Pricing, Tobin’s Q Theory, Mispricing Theory, Salience Theory