The Robustness of the CAPM-A Computational Approach

P. Jean-Jacques Herings and Felix Kubler

No 400, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of different specifications for preferences, endowments and dividends and compare the equilibrium prices and portfolio-holdings to the predictions of the CAPM. While the CAPM does not hold exactly for the chosen specification, it turns out that pricing-errors are extremely small. Furthermore, two-fund separation holds approximately.

Date: 2000-08-01
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Related works:
Working Paper: The Robustness of CAPM-A Computational Approach (2000)
Working Paper: The Robustness of the CAPM - A Computational Approach (1999)
Working Paper: The Robustness of the CAPM - A Computational Approach (1999)
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