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Equilibrium Prices of the Market Portfolio in the CAPM with Incomplete Financial Markets

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  • Chiaki Hara

    (Institute of Economic Research, Kyoto University)

Abstract

In the Capital Asset Pricing Model, we consider how introducing new assets will affect the prices of the existing ones. We prove that introducing new assets into financial markets increases the relative price of the market portfolio with respect to the risk-free bond if the elasticity of the marginal rates of substitution of the mean for standard deviation with respect to the latter is greater than one for every consumer; the relative price of the market portfolio decreases if the elasticity is less than one; and the relative price is left unchanged if the elasticity is equal to one.

Suggested Citation

  • Chiaki Hara, 2018. "Equilibrium Prices of the Market Portfolio in the CAPM with Incomplete Financial Markets," KIER Working Papers 1005, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1005
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP1005.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital Asset Pricing Model; generalequilibriumtheory; incomplete asset markets; nancialinnovation; expectedutility;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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