The Robustness of the CAPM: A Computational Approach

Tilburg University, CentER Working Paper No. 1999-54

34 Pages Posted: 14 Mar 2000

See all articles by P. Jean-Jacques Herings

P. Jean-Jacques Herings

Maastricht University

Felix Kubler

University of Zurich; Swiss Finance Institute

Date Written: 1999

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 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

Herings, P. Jean-Jacques and Kubler, Felix E., The Robustness of the CAPM: A Computational Approach (1999). Tilburg University, CentER Working Paper No. 1999-54, Available at SSRN: https://ssrn.com/abstract=200085 or http://dx.doi.org/10.2139/ssrn.200085

P. Jean-Jacques Herings (Contact Author)

Maastricht University ( email )

Department of Economics
P.O. Box 616
6200 MD Maastricht
Netherlands
+31 43 3883636 (Phone)
+31 43 3884878 (Fax)

HOME PAGE: http://www.personeel.unimaas.nl/p.herings/herings.htm

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
308
Abstract Views
1,628
rank
115,180
PlumX Metrics