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Extending the CAPM model

Hendri Adriaens and Bas Donkers ()

No 204, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: This paper extends the well known Capital Asset Pricing Model by Sharpe and Lintner to a multi-period context with possibly price dependent preferences. The model is built from individual forward looking agents adopting a portfolio selection scheme similar to the portfolio selection theory devised by Markowitz. We allow agents to use past and present price information to forecast both the expected return and the variance of asset returns, but with possibly different econometric forecasting techniques. Since the effects of price dependent preferences of agents are complicated, we use Microscopic Simulations to investigate the effects on equilibrium asset prices and on returns over an extended time period in a temporary equilibrium context. We also test whether the assumption of rational expectations makes sense

Keywords: multiperiod CAPM; heterogeneous agents; price dependent preferences; microscopic simulations (search for similar items in EconPapers)
JEL-codes: C10 G11 G12 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-cmp and nep-fin
Date: 2004-08-11
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