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Extending the CAPM model

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  • Hendri Adriaens
  • Bas Donkers

Abstract

This paper extends the well known Capital Asset Pricing Model by Sharpe and Lintner to a multi-period context with possibly price dependent preferences. The model is built from individual forward looking agents adopting a portfolio selection scheme similar to the portfolio selection theory devised by Markowitz. We allow agents to use past and present price information to forecast both the expected return and the variance of asset returns, but with possibly different econometric forecasting techniques. Since the effects of price dependent preferences of agents are complicated, we use Microscopic Simulations to investigate the effects on equilibrium asset prices and on returns over an extended time period in a temporary equilibrium context. We also test whether the assumption of rational expectations makes sense

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 204.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:204

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Keywords: multiperiod CAPM; heterogeneous agents; price dependent preferences; microscopic simulations;

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  1. repec:att:wimass:9725 is not listed on IDEAS
  2. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
  3. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
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