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Extending the CAPM model

Author

Listed:
  • 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

Suggested Citation

  • Hendri Adriaens & Bas Donkers, 2004. "Extending the CAPM model," Computing in Economics and Finance 2004 204, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:204
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    References listed on IDEAS

    as
    1. Arthur, W.B. & Holland, J.H. & LeBaron, B. & Palmer, R. & Tayler, P., 1996. "Asset Pricing Under Endogenous Expectations in an Artificial Stock Market," Working papers 9625, Wisconsin Madison - Social Systems.
    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. Duan Li & Wan‐Lung Ng, 2000. "Optimal Dynamic Portfolio Selection: Multiperiod Mean‐Variance Formulation," Mathematical Finance, Wiley Blackwell, vol. 10(3), pages 387-406, July.
    4. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    5. Levy, Haim & Levy, Moshe & Solomon, Sorin, 2000. "Microscopic Simulation of Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780124458901.
    6. B. LeBaron, 2001. "A builder's guide to agent-based financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 254-261.
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    Citations

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    Cited by:

    1. Ke-Hung Lai & Shu-Heng Chen & Ya-Chi Huang, 2005. "Bounded Rationality and the Elasticity Puzzle: What Can We Learn from the Agent-Based Computational Consumption Capital Asset Pricing Model?," Computing in Economics and Finance 2005 207, Society for Computational Economics.

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    More about this item

    Keywords

    multiperiod CAPM; heterogeneous agents; price dependent preferences; microscopic simulations;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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