Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-23T08:06:20.223Z Has data issue: false hasContentIssue false
  • English
  • Français

Capital Asset Pricing in a General Equilibrium Framework

Published online by Cambridge University Press:  06 April 2009

Paul H. Cootner  and
David H. Pyle
Get access Rights & Permissions [Opens in a new window]

Extract

The striking and powerful conclusions of the capital asset pricing model (CAPM) [13,8] arise from imposing the requirement that optimal individual portfolio decisions must be consistent with a market equilibrium for securities. That simple requirement–of market balance–produces the strong results that have been the centerpiece of research in finance in the last fifteen years. But despite the huge payoffs to imposing equilibrium requirements on financial markets, the CAP model remains a partial equilibrium result. The risks which are attributed to securities are strictly exogenous. Securities are risky because their prices fluctuate, but the cause of those price fluctuations is rarely specified. The literature seems to associate “market risk” with the business cycle and individual security risk with either random technological change or demand uncertainty. But whatever attribution is made, such risk remains outside of the model itself. Since the keystone of the CAPM is its important distinction between “real” or nondiversifiable risk and purely financial uncertainty, it is disconcerting to recognize that it is a model in which real quantities do not appear at all.

Type
II. Paul H. Cootner Memorial Session
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 4 , November 1978 , pp. 613 - 624
Copyright
Copyright © School of Business Administration, University of Washington 1978

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, Vol. 81 (05–06 1973).Google Scholar
[2]Cootner, P. “Asset Prices under Uncertainty: II, Single Risky Asset, Anticipated Harvests.” Unpublished manuscript.Google Scholar
[3]Diamond, P. “The Role of a Stock Market in a General Equilibrium Model with Technological Uncertainty.” American Economic Review, Vol. 57 (09 1967).Google Scholar
[4]Fleming, W. “Optimal Continuous-Parameter Stochastic Control.” SIAM Review, Vol. 11 (1969).Google Scholar
[5]Gihman, I., and Skorohod, A.. Stochastic Differential Equations. Springer-Verlag (1972).CrossRefGoogle Scholar
[6]Grossman, S. “The Existence of Futures Markets, Noisy Rational Expectations, and Information Externalities.” Review of Economic Studies, Vol. 44 (10 1977).CrossRefGoogle Scholar
[7]McKinnon, R. “Futures Markets, Buffer Stocks, and Income Stability for Primary Producers.” Journal of Political Economy, Vol. 75 (12 1967).CrossRefGoogle Scholar
[8]Merton, R. “An Intertemporal Capital Asset Pricing Model.” Econometrica, Vol. 41 (09 1973).Google Scholar
[9]Myers, S. “Procedures for Capital Budgeting under Uncertainty.” Industrial Management Review, Vol. 9 (Spring 1968).Google Scholar
[10]Samuelson, P. “Efficient Paths of Capital Accumulation in Terms of the Calculus of Variations.” The Collected Scientific Papers of Paul A. Samuelson, Vol. 1. MIT Press (1966).Google Scholar
[11]Samuelson, P. “Rational Theory of Warrant Pricing.” The Collected Scientific Papers of Paul A. Samuelson, Vol. 3 (1972).Google Scholar
[12]Samuelson, P. “Some Aspects of the Pure Theory of Capital.” The Collected Scientific Papers of Paul A. Samuelson, Vol. 1 (1966).Google Scholar
[13]Sharpe, W. “Capital Asset Prices: A Theory of Market Equilibrium under Uncertainty.” Journal of Finance, Vol. 19 (09 1964).Google Scholar