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A Generalization of the CAPM Based on a Property of the Covariance Operator

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  • Losq, Etienne
  • Chateau, John Peter D.

Abstract

A key assumption behind the traditional capital asset pricing model (CAPM) is the joint normality of security returns. Recently, however, this assumption has been relaxed in at least two directions. First, the emergence of continuous-time models has shifted emphasis from discrete-time random variables to continuous-time diffusion processes, with log-normality (as opposed to normality) for security prices in the stationary case. Second, the recognition that the CAPM is difficult to test empirically has led to the development of an asset pricing theory based on an arbitrage argument in large markets and free of any distributional assumption.

Suggested Citation

  • Losq, Etienne & Chateau, John Peter D., 1982. "A Generalization of the CAPM Based on a Property of the Covariance Operator," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(5), pages 783-797, December.
    • Handle: RePEc:cup:jfinqa:v:17:y:1982:i:05:p:783-797_01
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    Cited by:

    1. de La Bruslerie, H. & Deffains-Crapsky, C., 2008. "Information asymmetry, contract design and process of negotiation: The stock options awarding case," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 73-91, April.
    2. Kashyap, Ravi, 2019. "The perfect marriage and much more: Combining dimension reduction, distance measures and covariance," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    3. K. C. John Wei & Cheng F. Lee & Alice C. Lee, 1999. "Linear Conditional Expectation, Return Distributions, And Capital Asset Pricing Theories," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(4), pages 471-487, December.
    4. Ravi Kashyap, 2016. "The Perfect Marriage and Much More: Combining Dimension Reduction, Distance Measures and Covariance," Papers 1603.09060, arXiv.org, revised Jul 2019.

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