The Capital Asset Pricing Model as a General Equilibrium with Incomplete Markets
AbstractWe recast the capital asset pricing model (CAPM) in the broader context of general equilibrium with incomplete markets (GEI). In this setting we give proofs of three properties of CAPM equilibria: they are efficient, asset prices lie on a "security market line," and all agents hold the same two mutual funds. The first property requires a riskless asset, the latter two do not. We show that across all GEI only one of these three properties of equilibrium is generally valid: asset prices depend on covariances, not variances. We extend CAPM to many consumption goods in such a way that all three properties hold. But now the definition of a riskless asset depends on preferences and endowments, and so cannot be specified a priori.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 913.
Length: 34 pages
Date of creation: May 1989
Date of revision:
Publication status: Published in The Geneva Papers on Risk and Insurance Theory (May 1990), 15(1): 55-71
Note: CFP 759.
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