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The Capital Asset Pricing Model as a General Equilibrium With Incomplete Markets*


  • John Geanakoplos

    (Cowles Foundation, Yale University)

  • Martin Shubik

    (Cowles Foundation, Yale University)


We recast the capital asset pricing model (CAPM) in the broader context of general equilibrium with incomplete markets (GEI). In this setting we give proofs of three properties of CAPM equilibria: they are efficient, asset prices lie on a “security market line†, and all agents hold the same two mutual funds. The first property requires a riskless asset, the latter two do not. We show that across all GEI only one of these three properties of equilibrium is generally valid: asset prices depend on covariances, not variances. We extend CAPM to many consumption goods in such a way that all three properties hold. But now the definition of a riskless asset depends on preferences and endowments, and so cannot be specified a priori. The Geneva Papers on Risk and Insurance Theory (1990) 15, 55–71. doi:10.1007/BF01498460

Suggested Citation

  • John Geanakoplos & Martin Shubik, 1990. "The Capital Asset Pricing Model as a General Equilibrium With Incomplete Markets*," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 15(1), pages 55-71, March.
  • Handle: RePEc:pal:genrir:v:15:y:1990:i:1:p:55-71

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    Cited by:

    1. Shiller, Robert J., 1999. "Social security and institutions for intergenerational, intragenerational, and international risk-sharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 165-204, June.
    2. Csoka, Peter & Herings, P. Jean-Jacques & Koczy, Laszlo A., 2007. "Coherent measures of risk from a general equilibrium perspective," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2517-2534, August.
    3. Hens, Thorsten & Reimann, Stefan & Vogt, Bodo, 2004. "Nash competitive equilibria and two-period fund separation," Journal of Mathematical Economics, Elsevier, vol. 40(3-4), pages 321-346, June.
    4. Schoch, Daniel, 2017. "Generalised mean-risk preferences," Journal of Economic Theory, Elsevier, vol. 168(C), pages 12-26.

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