A General Equilibrium Approach to Asset Pricing in an Efficient Market

Posted: 15 Jul 1998

See all articles by Ralph Chami

Ralph Chami

International Monetary Fund (IMF)

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Connel Fullenkamp

Duke University - Department of Economics

Date Written: November 1995

Abstract

This paper derives closed-form solutions for asset returns, investment, consumption and inflation in an economy with multi-good Cobb-Douglas production and consumer preferences as in Epstein and Zin (1991). The implied solutions are relatively simple, with an index of aggregate marginal product of capital forming the main determinant of asset returns. Consumption may be substituted out of the asset pricing relationship entirely. It is shown that this model may be viewed as a generalized Capital Asset Pricing Model (CAPM). The paper estimates the asset pricing relationships for returns on 17 portfolios of 2-digit SIC manufacturing industries and the automobile industry. The performance of this model is also compared with the results of the static CAPM, the factor model of Chen, Roll, and Ross (1986), the consumption based CAPM and Marshall's (1992) asset-pricing model using goodness-of-fit tests under the generalized method of moments procedure. The overall evidence suggests that the general equilibrium model is itself a reasonable model of returns and is competitive with other standard asset pricing models.

JEL Classification: G12, E3, E4

Suggested Citation

Chami, Ralph and Cosimano, Thomas F. and Fullenkamp, Connel, A General Equilibrium Approach to Asset Pricing in an Efficient Market (November 1995). Available at SSRN: https://ssrn.com/abstract=7021

Ralph Chami (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
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202-623-6039 (Phone)
202-623-6068 (Fax)

Thomas F. Cosimano

University of Notre Dame ( email )

513 W. Broad #704
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United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Connel Fullenkamp

Duke University - Department of Economics ( email )

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Durham, NC 27708-0204
United States
(919) 660-1800 (Phone)

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