Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
0Activity
0 of .
Results for:
No results containing your search query
P. 1
34

34

Ratings: (0)|Views: 2|Likes:
Published by somebody314

More info:

Published by: somebody314 on May 17, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

05/17/2012

pdf

text

original

 
American Finance Association
The Market Model and Capital Asset Pricing Theory: A NoteAuthor(s): R. C. Stapleton and M. G. SubrahmanyamSource:
The Journal of Finance,
Vol. 38, No. 5 (Dec., 1983), pp. 1637-1642Published by: Blackwell Publishing for the American Finance AssociationStable URL:
Accessed: 07/01/2010 07:58
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/action/showPublisher?publisherCode=black .Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.
 Blackwell Publishing
and
 American Finance Association
are collaborating with JSTOR to digitize, preserveand extend access to
The Journal of Finance.
http://www.jstor.org
 
THEJOURNAL OF FINANCE*VOL. XXXVIII,NO. 5*DECEMBER 1983
The Market Model andCapitalAssetPricingTheory:ANote
R. C. STAPLETON and M. G.SUBRAHMANYAM*ABSTRACTThis note shows that a linearmarket modelissufficient toderivealinearrelationshipbetween betaandexpectedreturn.Furthermore,heslopeof therelationshipwillbeidenticalwiththatoftheCapitalAssetPricingModel if the return on themarketportfoliosnormallydistributed.However,resultsfrom characterizationheory suggestthat the linear marketmodelassumptionsclose tothat ofmultivariatenormality.
THEMARKETMODEL,
acommonspecificationofthereturn-generatingprocessfor commonstocks,holdsacentralplaceinfinancial economics. This note showsthatalinear market modelimpliesthesecuritymarket lineassociatedwith theCapital AssetPricingModel(CAPM)ofSharpe [18],Lintner[6],andMossin[9]. However,the distributionalassumptions implicitin the linear marketmodelare suchthat thegeneralizationachievedisslight.Resultsfromcharacterizationtheoryareused toshow that when a linearmarket model withhomoscedasticerrorsholdsforeachstock,multivariatenormalityisimplied.Theresultsinthis note have implications for theArbitrage PricingTheory(APT)ofRoss ([12],[13])andRolland Ross[11].InRoss[13],whereasinglefactormodel is proposed with the return on themarketasthefactor,alargenumbersargumentisused which allows thederivationofthesecuritymarketline"without the additionalbaggageof mean variancetheory." However, givensimilarassumptions,weshow here that thesamerelationshipcan be derivedwithoutthe approximationmplicitintheAPTargument.I.Specificationsof theMarket ModelConsideraone-periodeconomy andletXjand XMdenote the cashflows of firmjandthemarketportfolio,respectively.PjandPMare the currentmarketvaluesof firmjandtheaggregateof allfirms,respectively,and denoteR,=X/P,asthepricerelativeofstockj.RMssimilarlydefined,andRis oneplustheriskfreerate ofinterest. We meanbythemarketmodeltheregression
Ri
=
a,+#jRM+c,,E(c9)
=O,
E(cjRM)
=O,
V,
(1)We donot make theadditionalassumptionthat
E(Cjfk)
=
0
We need to notetwoaspectsofEquation(1).First,sinceP,andPMare
*National WestminsterBank Professor of BusinessFinance,ManchesterBusiness School, andProfessorofFinance, New YorkUniversity,respectively.We would ike tothank the editor,MichaelJ.Brennan,and thereferee,GordonSick,for theircomments.1637
 
1638The JournalofFinance
nonstochastic,(1) couldbe derived romthe morefundamentaltochasticrelationbetweencashflows
X,=a,+
b,XM+
e,(2)We will useboth versions(1)and(2)of the marketmodel.Secondly,asmanyauthorshavepointedout,the conditionE(EjRM)0placesno restrictiononthejointdistributionof
RJ
and
RM
and amounts toforcingaregressionbetweenthetwo variables.Inthecontextof thispaper,it is crucialtodistinguishdifferentlevelsofspecificationofthemarketmodel. In SectionI,forexample,we alsoassumelinearityof the model.Tobeprecise,thismeans
E(EjIRM)=O,VRM, R,
(3)InSectionII, wemake afurtherspecificationofE,,assumingthat itishomosce-dastic. This canbethoughtof asa third-levelspecificationandshouldbedistinguishedfromafourthcasewhereE,sindependentof
RM.
The marketmodelinany of these forms is apurelystatistical relationwhileassetpricing theorieshaveeconomic content. Inparticular,assetpricingmodelscanbethoughtof asplacingrestrictionsona,in the unconditionalexpectationof(1).Forinstance,witha,=0,for allj,the cross-sectionallinearityoftheCAPMholds,if
R,
and
RM
areinterpretedasexcess returnsover
R.
Wemoveonnowto examinethe implicationsofthemarketmodelforassetpricing.II.AssetPricing withaLinear Market ModelMany differentspecificationsof theCAPMhavebeen proposed.Inthis note wewill referto thesecuritymarket line
E(Rj)
=
R +[E(RM)R(4)derivedoriginally bySharpe [18]as the CAPM.We nowshowthat(4) followsfrombasicprinciplesofinvestor utilitymaximization ifCondition(3)ofthemarket modelholds.Forsimplicity, assumethat thepreferencesofinvestors can besummarizedbyarepresentative nvestorwith autility functionU(c).1Giventheassumption ofasingle-periodeconomy,aggregateconsumptionequalsaggregateash flow.Withtheopportunitytoborrowor lend attherisk-freerate,thefirst-orderconditionsfor amaximumE[U(c)] yield thepricingrelations
E[U'(XM)X]
-
PRE[U'(XM)]
=
, V,
(5)Rearranging 5)andusing thedefinitionofcovarianceyields
Pj=R-1[E(Xj)+
cov(X,,
U'(XM))/E(U'(XM))],VJ
(6)However, furtherspecification of(6) to obtainthe CAPMtypicallyrequirestheassumption ofquadraticutilityorjoint normalityofX,and
XM.
Eitherassump-
'Thisassumptionavoids theaggregationproblemdiscussedbyRubinstein[16].Equation(4)isderivedby Brennan[1]andisconsistentwiththe statepreferenceanalysisofRubinstein[17].

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->