The Intertemporal Capital Asset Pricing Model with returns that follow Poisson jump–diffusion processes

Eric Bentzen and Peter Sellin

The European Journal of Finance, 2003, vol. 9, issue 2, 105-124

Abstract: Capital market equilibrium is derived in a model where asset returns follow a mixed Poisson jump–diffusion process. In the resulting modified Capital Asset Pricing Model (CAPM) expected returns are still linear in beta, but in addition premia have to be paid to compensate the investor for taking on jump risk. When jump risk is diversifiable in the market portfolio the model is reduced to the standard CAPM. Jumps are found to be prevalent in the daily returns of the market indices in the 18 countries investigated. A continuous return process does not give an adequate description of the market returns in any of the countries investigated.

Date: 2003
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DOI: 10.1080/13518470110099704

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