Approximate CAPM When Preferences are CRRA
In general equilibrium models of financial markets, the capital 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 endowments and dividends 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. Copyright Springer Science+Business Media, LLC 2007
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 29 (2007)
Issue (Month): 1 (February)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/economic+theory/journal/10614/PS2|
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.:
- Heaton, John & Lucas, Deborah J, 1996.
"Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing,"
Journal of Political Economy,
University of Chicago Press, vol. 104(3), pages 443-487, June.
- John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
- Andrew Ang & Joseph Chen & Yuhang Xing, 2005.
Board of Governors of the Federal Reserve System (U.S.).
- Theresa K. Lant & Stephen J. Mezias, 1992. "An Organizational Learning Model of Convergence and Reorientation," Organization Science, INFORMS, vol. 3(1), pages 47-71, February.
- Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-317, June.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- P.J.J. Herings & F. Kubler, 2001.
"Computing Equilibria in Finance Economies,"
GE, Growth, Math methods
- Herings P. Jean-Jacques & Kubler Felix, 2000. "Computing Equilibria in Finance Economies," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Herings P. Jean-Jacques & Kubler Felix, 2002. "Computing Equilibria in Finance Economies," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Hult, G. Tomas M. & Ferrell, O. C., 1997. "A global learning organization structure and market information processing," Journal of Business Research, Elsevier, vol. 40(2), pages 155-166, October.
- Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
- Robert F. Dittmar, 2002. "Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 57(1), pages 369-403, 02.
- Ghemawat, Pankaj & Ricart, Joan E., 1993. "Organizational tension between static and dynamic efficiency, The," IESE Research Papers D/255, IESE Business School.
- Constance E. Helfat, 1994. "Evolutionary Trajectories in Petroleum Firm R&D," Management Science, INFORMS, vol. 40(12), pages 1720-1747, December.
- John Geanakoplos & Martin Shubik, 1989. "The Capital Asset Pricing Model as a General Equilibrium with Incomplete Markets," Cowles Foundation Discussion Papers 913, Cowles Foundation for Research in Economics, Yale University.
- Mary Beth Pinto & Jeffrey K. Pinto & John E. Prescott, 1993. "Antecedents and Consequences of Project Team Cross-Functional Cooperation," Management Science, INFORMS, vol. 39(10), pages 1281-1297, October.
- Berk, Jonathan B., 1997. "Necessary Conditions for the CAPM," Journal of Economic Theory, Elsevier, vol. 73(1), pages 245-257, March.
When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:29:y:2007:i:1:p:13-31. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.