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The Robustness of the CAPM - A Computational Approach

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  • Herings, P.J.J.
  • Kubler, F.

    (Tilburg University, Center for Economic Research)

Abstract

In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of different specifications for preferences, endowments and dividends and compare the equilibrium prices and portfolio-holdings to the predictions of the CAPM. While the CAPM does not hold exactly for the chosen specification, it turns out that pricing errors are extremely small. Furthermore, two-fund separation holds approximately.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1999-54.

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Date of creation: 1999
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Handle: RePEc:dgr:kubcen:199954

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Keywords: asset pricing; general equilibrium; incomplete markets; computational methods;

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  17. Hens,Thorsten, 1991. "Structure of general equilibrium models with incomplete markets and a single consumption good," Discussion Paper Serie A 353, University of Bonn, Germany.
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Cited by:
  1. Herings,P. Jean-Jacques & Kubler,Felix, 2000. "Computing Equilibria in Finance Economies," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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