The Robustness of the CAPM - A Computational Approach

P.J.J. Herings, F. Kubler

Research output: Working paperDiscussion paperOther research output

244 Downloads (Pure)

Abstract

In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of different specifications for preferences, endowments and dividends and compare the equilibrium prices and portfolio-holdings to the predictions of the CAPM. While the CAPM does not hold exactly for the chosen specification, it turns out that pricing errors are extremely small. Furthermore, two-fund separation holds approximately.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages41
Volume1999-54
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper
Volume1999-54

Fingerprint

Capital asset pricing model
Robustness
Equilibrium price
Benchmark
Approximate equilibria
General equilibrium model
Prediction
Pricing errors
Endowments
Mutual fund separation theorem
Dividends
Mean-variance
Pricing
Incomplete markets

Keywords

  • asset pricing
  • general equilibrium
  • incomplete markets
  • computational methods

Cite this

Herings, P. J. J., & Kubler, F. (1999). The Robustness of the CAPM - A Computational Approach. (CentER Discussion Paper; Vol. 1999-54). Tilburg: Microeconomics.
Herings, P.J.J. ; Kubler, F. / The Robustness of the CAPM - A Computational Approach. Tilburg : Microeconomics, 1999. (CentER Discussion Paper).
@techreport{06a4e5b2f3804d5ba96f82be861692ba,
title = "The Robustness of the CAPM - A Computational Approach",
abstract = "In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of different specifications for preferences, endowments and dividends and compare the equilibrium prices and portfolio-holdings to the predictions of the CAPM. While the CAPM does not hold exactly for the chosen specification, it turns out that pricing errors are extremely small. Furthermore, two-fund separation holds approximately.",
keywords = "asset pricing, general equilibrium, incomplete markets, computational methods",
author = "P.J.J. Herings and F. Kubler",
note = "Pagination: 41",
year = "1999",
language = "English",
volume = "1999-54",
series = "CentER Discussion Paper",
publisher = "Microeconomics",
type = "WorkingPaper",
institution = "Microeconomics",

}

Herings, PJJ & Kubler, F 1999 'The Robustness of the CAPM - A Computational Approach' CentER Discussion Paper, vol. 1999-54, Microeconomics, Tilburg.

The Robustness of the CAPM - A Computational Approach. / Herings, P.J.J.; Kubler, F.

Tilburg : Microeconomics, 1999. (CentER Discussion Paper; Vol. 1999-54).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - The Robustness of the CAPM - A Computational Approach

AU - Herings, P.J.J.

AU - Kubler, F.

N1 - Pagination: 41

PY - 1999

Y1 - 1999

N2 - In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of different specifications for preferences, endowments and dividends and compare the equilibrium prices and portfolio-holdings to the predictions of the CAPM. While the CAPM does not hold exactly for the chosen specification, it turns out that pricing errors are extremely small. Furthermore, two-fund separation holds approximately.

AB - In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of different specifications for preferences, endowments and dividends and compare the equilibrium prices and portfolio-holdings to the predictions of the CAPM. While the CAPM does not hold exactly for the chosen specification, it turns out that pricing errors are extremely small. Furthermore, two-fund separation holds approximately.

KW - asset pricing

KW - general equilibrium

KW - incomplete markets

KW - computational methods

M3 - Discussion paper

VL - 1999-54

T3 - CentER Discussion Paper

BT - The Robustness of the CAPM - A Computational Approach

PB - Microeconomics

CY - Tilburg

ER -

Herings PJJ, Kubler F. The Robustness of the CAPM - A Computational Approach. Tilburg: Microeconomics. 1999. (CentER Discussion Paper).