In this paper we test computationally the performance of CAPM in an evolutionary setting. In particular we study the stability of wealth distribution in a financial market where some traders invest as prescribed by CAPM and others behave according to different portfolio rules. Our study is motivated by recent analytical results that show that, whenever a logarithmic utility maximiser enters the...

Financial economists have derived equilibrium asset pricing models such as the Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) and the consumption-oriented CAPM of Breeden (1979). Subsequent work (e.g., Black, Jensen, and Scholes 1972; Fama and MacBeth 1973; Breeden, Gibbons, and Litzenberger 1989) examined the empirical performance of unconditional versions of these asse...

This paper examines the conditions required to guarantee positive prices in the CAPM. Positive prices imply an upper bound on the equity premium. This upper bound depends on the degree of diversity of firms’ fundamentals, and it is independent of investors’ preferences. In economies with realistically diverse assets the only positive-price CAPM equilibrium theoretically possible is a degenerate...

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...

We model conditional market beta and alpha as flexible functions of state variables identified via a formal variable selection procedure. In the post-1963 sample, beta of the value premium comoves strongly with unemployment, inflation, and price-earnings ratio in a countercyclical manner. We also uncover a novel nonlinear dependence of alpha on business conditions: It falls sharply and becomes ...

We investigate the Capital Asser PricingModel CAPM with time dimension. By using time series analysis, we discuss the estimation of CAPM when market portfolio and the error process are long-memory process and correlated with each other. We give a sufficient condition for the return of assets in the CAPM to be short memory. In this setting, we propose a two-stage least squares estimator for the ...

This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the CAPM and the Fama-French three-factor model. In out-of-sample testing, both the CAPM and the three-factor model are rejected. In contrast, the reward beta approach easily p...

Capital Asset Pricing Model (CAPM) provides an equilibrium linear relationship between expected return and risk of an asset. The purpose of this paper is to investigate a risk-return relationship within the CAPM framework. The study also aims at exploring whether CAPM is a good indicator of asset pricing in Bangladesh. For this study, a period 19992003 have been considered. Fama-French [1992] m...