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The Robustness of the CAPM - A Computational Approach

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  • Herings, P.J.J.

    (Tilburg University, Center For Economic Research)

  • Kubler, F.

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Herings, P.J.J. & Kubler, F., 1999. "The Robustness of the CAPM - A Computational Approach," Discussion Paper 1999-54, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:06a4e5b2-f380-4d5b-a96f-82be861692ba
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    Cited by:

    1. Oana Secrieru, 2004. "The Economic Theory of Retail Pricing: A Survey," Staff Working Papers 04-8, Bank of Canada.
    2. P. Jean-Jacques Herings & Felix Kubler, 2002. "Computing Equilibria in Finance Economies," Mathematics of Operations Research, INFORMS, vol. 27(4), pages 637-646, November.
    3. Lau, Amy Hing Ling & Lau, Hon-Shiang & Wang, Jian-Cai, 2010. "Usefulness of resale price maintenance under different levels of sales-effort cost and system-parameter uncertainties," European Journal of Operational Research, Elsevier, vol. 203(2), pages 513-525, June.

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    More about this item

    Keywords

    asset pricing; general equilibrium; incomplete markets; computational methods;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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