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The Robustness of CAPM-A Computational Approach

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Author Info
Herings,O. Jean-Jacques
Kubler,Felix (METEOR)

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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 CAPM. While we show that CAPM cannot 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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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 035.

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Date of creation: 2000
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Handle: RePEc:dgr:umamet:2000035

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Keywords: financial economics and financial management ;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Feldstein, Martin S, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," Review of Economic Studies, Blackwell Publishing, vol. 36(105), pages 5-12, January. [Downloadable!] (restricted)
  2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  3. Jérôme B. Detemple & Piero Gottardi, 1997. "Aggregation, Efficiency and Mutual Fund Separation in Incomplete Markets," CIRANO Working Papers 97s-11, CIRANO. [Downloadable!]
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  1. Herings,P. Jean-Jacques & Kubler,Felix, 2002. "Computing Equilibria in Finance Economies," Research Memoranda 010, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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  2. Talman, A.J.J. & Thijssen, J.J.J., 2003. "Existence of Equilibrium and Price Adjustments in a Finance Economy with Incomplete Markets," Discussion Paper 2003-79, Tilburg University, Center for Economic Research. [Downloadable!]
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