The Capital Asset Pricing Model as a General Equilibrium with Incomplete Markets

John Geanakoplos () and Martin Shubik
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos

No 913, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We recast the capital asset pricing model (CAPM) in the broader context of general equilibrium with incomplete markets (GEI). In this setting we give proofs of three properties of CAPM equilibria: they are efficient, asset prices lie on a "security market line," and all agents hold the same two mutual funds. The first property requires a riskless asset, the latter two do not. We show that across all GEI only one of these three properties of equilibrium is generally valid: asset prices depend on covariances, not variances. We extend CAPM to many consumption goods in such a way that all three properties hold. But now the definition of a riskless asset depends on preferences and endowments, and so cannot be specified a priori.

Keywords: Capital asset pricing model; incomplete markets; asset prices; CAPM; general equilibrium model (search for similar items in EconPapers)
Pages: 34 pages
Date: 1989-05
Note: CFP 759.
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Citations: View citations in EconPapers (10)

Published in The Geneva Papers on Risk and Insurance Theory (May 1990), 15(1): 55-71

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