Development of an Equity Pricing Model for Biotechnological Companies

This paper is dedicated to perfecting already existing asset pricing models to account for specificity of R&D intensive sectors as well as sectors with high risk profile. To achieve this goal traditional analysis of the impact of R&D expenditures on stock returns was carried out, and a fairly new direction – tail risk analysis (examining risk of obtaining extremely low returns) – in asset pricing was studied. According to the results of the study, the hypothesis of significant impact of R&D expenses on asset returns was rejected, which is consistent with a number of works (Milburn (1971), Sougiannis (1994)). At the same time, the analysis showed the importance of both the factor measuring the aggregate tail risk and the factor approximating the individual tail risk. Moreover, orthogonal decomposition of the effect showed the ability of the tail risk to explain some asset pricing anomalies.