Existence of Equilibrium and Zero-Beta Pricing Formula in the Capital Asset Pricing Model with Heterogeneous Beliefs

Ning Sun () and Zaifu Yang
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Ning Sun: Faculty of System Science and Technology, Akita Prefectural University

Annals of Economics and Finance, 2003, vol. 4, issue 1, 51-71

Abstract: We study a mean-variance capital asset pricing model (CAPM) in which investors have different probability beliefs about assets returns and different attitudes towards risk, all assets are risky, short-selling is allowed and satiation is possible. First, we prove that there exists a competitive equilibrium in the model under a rather general condition. This condition indicates a simple relationship among initial endowment vectors, risk aversion ratio functions, perceived mean vectors and covariance matrices of all investors. Secondly, we derive a zero-beta pricing formula for the model which generalizes the well known Black¡¯s zero-beta pricing formula. In addition, we find in closed form an equilibrium price vector expressed in terms of perceived mean vectors, covariance matrices, and initial endowments of all investors.

Keywords: Capital asset pricing model; Heterogeneity; Equilibrium theorem; Pricing formula (search for similar items in EconPapers)
JEL-codes: C61 C62 C68 D52 D84 G11 G12 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (13)

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