The Robustness of the CAPM: A Computational Approach
Tilburg University, CentER Working Paper No. 1999-54
34 Pages Posted: 14 Mar 2000
Date Written: 1999
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 specications 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 specifcation, it turns out that pricing-errors are extremely small. Furthermore, two-fund separation holds approximately.
JEL Classification: C61, C62, C63, D52, G11, G12
Suggested Citation: Suggested Citation