Approximate CAPM When Preferences Are CRRA

P. Jean-Jacques Herings () and Felix Kubler ()

No 64, Research Memoranda from Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization

Abstract: In general equilibrium models of financial markets, the cpital asset pricing formula does not hold when agents have von Neumann-Morgenstern utility with constant relative risk aversion. In this paper we examine under which conditions on endownments and dividens the pricing formula provides a good benchmark for equilibrium returns. While it is easy to construct examples where equilibrium returns are arbitrarily far from those predicted by CAPM, we show that there is a large class of economies where CAPM provides a very good approximation. Although the pricing formula does not hold exactly for the chosen specification, it turns out that pricing-errors are extremely small.

Keywords: Economics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2003

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Journal Article: Approximate CAPM When Preferences are CRRA (2007)
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