Approximate CAPM when preferences are CRRA
AbstractIn general equilibrium models of financial markets, the cpital asset pricing formula does not hold when agents have von Neumann-Morgenstern utility with constant relative risk aversion. In this paper we examine under which conditions on endownments and dividens the pricing formula provides a good benchmark for equilibrium returns. While it is easy to construct examples where equilibrium returns are arbitrarily far from those predicted by CAPM, we show that there is a large class of economies where CAPM provides a very good approximation. Although the pricing formula does not hold exactly for the chosen specification, it turns out that pricing-errors are extremely small.
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Bibliographic InfoPaper provided by Maastricht University in its series Open Access publications from Maastricht University with number urn:nbn:nl:ui:27-12150.
Date of creation: 2007
Date of revision:
Publication status: Published in Computational economics (2007) v.29, p.13-31
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Other versions of this item:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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