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Extending the CAPM model

Author

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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

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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    File URL: http://stuwww.uvt.nl/~hendri/University/Files/paperCAPM.pdf
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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. Levy, Haim & Levy, Moshe & Solomon, Sorin, 2000. "Microscopic Simulation of Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780124458901.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    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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