Herings, P. Jean-Jacques: The Robustness of the CAPM-A Computational Approach
World Conference Econometric Society, 2000, Seattle

P. Jean-Jacques Herings, Universiteit Maastricht
Felix Kubler, Yale University
The Robustness of the CAPM-A Computational Approach
Session: C-9-19  Monday 14 August 2000  by Herings, P. Jean-Jacques
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.

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