The CAPM Equation, Market Semi-Clearing and Pseudo-Equilibrium Pricing

Abstract

In the Capital Asset Pricing Model (CAPM), the market clearing is equivalent to the market portfolio's clearing: the clearing of its weight (semi-clearing condition) and value together. We prove that the CAPM equation is equivalent to the semi-clearing condition and the value of the market portfolio is a free variable. Additionally, we present the analytic solution to the mimicking payoff equivalent to the CAPM equation. Finally, we show that beta pricing is a pseudo-equilibrium pricing because what it actually does is a linear pricing relative to the market portfolio, it can only be used to price reachable payoffs.

Keywords: Market Semi-Clearing Condition, Pseudo-Equilibrium Pricing, Law of Asset Portfolio, SDF Mimicking Portfolio, Beta Pricing

JEL Classification: D53, G12