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

Posted: 12 Jan 2023

Date Written: January 12, 2023

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

Suggested Citation

Abad, Pharos, The CAPM Equation, Market Semi-Clearing and Pseudo-Equilibrium Pricing (January 12, 2023). Available at SSRN: https://ssrn.com/abstract=4323028 or http://dx.doi.org/10.2139/ssrn.4323028

Pharos Abad (Contact Author)

Ping-Tang University ( email )

China

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