The existence theorem of Allingham (Econometrica 59:1169–1174, 1991) for the capital asset pricing model (CAPM) is generalized to the case where agents have heterogeneous expectations on the return distribution and the mean-variance utility functions are quasiconcave. This result is built upon new conditions which are distinct from and weaker than the conditions imposed on the CAPM in the liter...

We show that Black Capital Asset Pricing Model (Black CAPM) is extremely sensitive to the choice of the market portfolio and becomes unstable as market portfolios approach the Global Minimum-Variance portfolio. When market portfolios approach the minimum-variance portfolio, the expected return on the zero beta asset approaches negative infinity and its variance increases rapidly. Moreover, expe...

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 di erent speci cations for preferences, endowments and dividends and c...

Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W Second Quarter 2002 D o financial markets offer higher rewards in the form of average returns for holding risks related to recessions and financial distress in addition to the risks from overall market movements? The answer to this question is related to the way financial economists understand the investment world. Fifteen years ago, f...

This paper derives a dynamic version of the international CAPM. The exchange-rate risk factors and intertemporal hedging factors are derived endogenously in a model that builds upon Campbell (1993). We provide a theoretical foundation for empirical risk factors often used in international asset pricing, including dividend yields, forward premia and, especially, exchange-rate indices. The model ...

Most practitioners measure investment performance based on the CAPM, determining portfolio "alphas" or Sharpe Ratios. But the validity of this analysis rests on the validity of the CAPM, which assumes either normally distributed (and therefore symmetric) returns, or mean-variance preferences. Both assumptions are suspect: even if asset returns were normally distributed, the returns of options o...

Downside and asymmtric risk measurement lends itself naturally to emerging equity markets, and offer an attractive alternative to traditional techniques.We investigate which of three models best fits the equity returns of emerging markets: CAPM, the Lower Partial Moment CAPM (LPM-CAPM), and an Asymmetric Response Model (ARM), and discuss implications for investment strategies and risk managemen...

The CAPM is still considered a first-order intellectual achievement, in spite of the current thought leaders also describing it as being “empirically vacuous” (Fama and French, 2006) or that “having a low, middle or high beta does not matter; the expected return is the same” (Ross, 1993).1 In­ deed, I would say the situation is worse, as volatility and beta are generally negatively correlated w...