Equilibria in the CAPM with Nontradeable Endowments

32 Pages Posted: 23 Jan 2014 Last revised: 10 Dec 2015

See all articles by Pablo Koch-Medina

Pablo Koch-Medina

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Jan Wenzelburger

University of Liverpool - Management School (ULMS)

Date Written: November 2015

Abstract

This paper establishes existence and uniqueness of equilibria in a capital asset pricing model (CAPM) with non-tradeable endowments. The result is obtained by generalising the classical two-fund separation for asset-demand functions to reduce a multi-variate fixed-point problem to a uni-variate one. The paper highlights the importance of two limiting properties of agents’ risk aversion. First, individual asset demand may become undefined if the limiting slopes of the investor’s indifference curves are finite. Second, agents’ aggregate demand for risk may be bounded from above so that no equilibrium exists if market risk is too large. The paper provides an explicit pricing formula and a generalised security market line and studies the effect of non-traded endowments on asset prices and asset allocations.

Keywords: Portfolio choice, CAPM, Non-tradeable Endowments, Risk Aversion

JEL Classification: G10, C62

Suggested Citation

Koch-Medina, Pablo and Wenzelburger, Jan, Equilibria in the CAPM with Nontradeable Endowments (November 2015). Available at SSRN: https://ssrn.com/abstract=2383761 or http://dx.doi.org/10.2139/ssrn.2383761

Pablo Koch-Medina (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Swiss Finance Institute ( email )

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

Jan Wenzelburger

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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