Approximate CAPM When Preferences are CRRA

P. Jean-Jacques Herings and Felix Kubler

Computational Economics, 2007, vol. 29, issue 1, 13-31

Abstract: In general equilibrium models of financial markets, the capital 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 endowments and dividends 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. Copyright Springer Science+Business Media, LLC 2007

Keywords: asset pricing; general equilibrium; incomplete markets; D52; D58; G11; G12 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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Working Paper: Approximate CAPM when preferences are CRRA (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:compec:v:29:y:2007:i:1:p:13-31

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DOI: 10.1007/s10614-006-9061-3

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