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A Generalization of the CAPM Based on a Property of the Covariance Operator

Published online by Cambridge University Press:  06 April 2009

Etienne Losq  and
John Peter D. Chateau
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Extract

A key assumption behind the traditional capital asset pricing model (CAPM) is the joint normality of security returns. Recently, however, this assumption has been relaxed in at least two directions. First, the emergence of continuous-time models has shifted emphasis from discrete-time random variables to continuous-time diffusion processes, with log-normality (as opposed to normality) for security prices in the stationary case. Second, the recognition that the CAPM is difficult to test empirically has led to the development of an asset pricing theory based on an arbitrage argument in large markets and free of any distributional assumption.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 17 , Issue 5 , December 1982 , pp. 783 - 797
Copyright
Copyright © School of Business Administration, University of Washington 1982

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