In this paper we test for the inclusion of the bid-ask spread in the consumption CAPM, in the UK stock market over the time period of 1980-2000. Two econometric models are used; first, Fisher’s (1994) asset pricing model is estimated by GMM, and secondly, the VAR approach proposed by Campbell and Shiller is extended to include the bid-ask spread. Overall the statistical tests are unable to reje...

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The existence of mean-variance efficient positive portfolios – portfolios with no negative weights – is a key requirement for equilibrium in the Capital Asset Pricing Model (CAPM). Brennan and Lo (2010) define an “impossible frontier” as a frontier on which all portfolios have at least one negative weight. They prove that for randomly drawn covariance matrices the probability of obtaining an im...

Article history: Received 3 August 2014 Received in revised form 27 September 2014 Accepted 24 October 2014 Available online 3 November 2014

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other inves...

The need for understanding the propagation mechanisms behind the recent financial crises lead the increased interest for works associated with systemic risks. In this framework, network-based methods have been used to infer from data the linkages between institutions (or companies. Part of the literature postulates that systemic risk is strictly related (if not equal) to systematic risk. In thi...

We study properties of structured financial products optimizing a utility functional of a customer. The conventional method may have the disadvantage that the a priori restriction to a certain number of assets could make it impossible to find the optimal portfolio. So instead of optimizing the distribution of given assets, we impose only the price constraint as given by the CAPM and optimize th...

In an asset-pricing model calibrated to match the standard asset pricing empirical properties –in particular, the time-variation in the equity premium – we calculate the welfare (value) implications of sub-optimal capital budgeting decisions. Specifically, we calculate that an investment policy that ignores the timevariation in the equity premium, such as would occur with a cost of capital foll...

In strict terms, the Capital Asset Pricing Model applies only to marketed assets, but the CAPM is frequently used to assign prices to nonmarketed assets as well. The Correlation Pricing Formula (CPF) is similar in form to the CAPM, and gives the same result. However, the CPF expresses the price of a nonmarketed asset in terms of a priced asset that is most correlated with the nonmarketed asset,...

In this paper it is demonstrates that if assets are priced according to Black’s (1972) CAPM, then tests on the cointegrated VAR can reveal evidence for or against integration of financial markets. If the market portfolios cointegrate one-to-one and share the same deterministic long-run trend, the markets obey the law of one price. Furthermore, it is shown how the driving force of the prices can...