The Robustness of CAPM-A Computational Approach
AbstractIn 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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Bibliographic InfoPaper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 035.
Date of creation: 2000
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financial economics and financial management ;
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