Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-15T10:17:01.810Z Has data issue: false hasContentIssue false
  • English
  • Français

Capital Asset Pricing with Price Level Changes

Published online by Cambridge University Press:  19 October 2009

Robert L. Hagerman  and
E. Han Kim
Get access Rights & Permissions [Opens in a new window]

Extract

A capital asset-pricing model which relates risk and return under conditions of changing price levels has been developed in this paper. The resulting model implies that price-level changes do not affect the expected real returns on individual assets except through their impact on the return of the market portfolio. If real market returns are independent of price-level movements, the model is very much like the standard capital asset-pricing model expressed in real returns. This version of the capital asset-pricing model does not, however, resolve all the difficulties associated with changing price levels, since we have assumed that the nominal default-free rate is determined outside the model and that relative prices do not change. These limitations, however, also apply to all other single-period capital asset-pricing models.

In addition, the model was converted into nominal returns by assuming that price-level changes and the real market returns are uncorrelated. The resulting equation illustrates the difficulty involved in using nominal returns to test a model expressed in real returns. The same equation also provides a possible explanation for the noted discrepancies between the empirical' evidence found by Black, Jensen, and Scholes [3] and the prediction of the traditional capital asset-pricing model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 3 , September 1976 , pp. 381 - 391
Copyright
Copyright © School of Business Administration, University of Washington 1976

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]Bailey, M., and Jensen, M. C.. “Risk and the Discount Rate for Public Investments.” In Studies in the Theory of Capital Markets, edited by Jensen, M. C.. New York: Praeger Publishers, 1972.Google Scholar
[2]Black, F. “Capital Market Equilibrium with Restricted Borrowing.” Journal of Business, vol. 45 (July 1972), pp. 444–454.CrossRefGoogle Scholar
[3]Black, F.; Jensen, M.; and Scholes, M.. “The Capital Asset Pricing Model: Some Empirical Tests.” In Studies in the Theory of Capital Markets, edited by Jensen, M. C.. New York: Praeger Publishers, 1973.Google Scholar
[4]Chen, A., and Boness, J.. “Effects of Uncertain Inflation on the Investment and Financial Decisions of a Firm.” Journal of Finance. Forthcoming.Google Scholar
[5]Fama, E. F., and MacBeth, J. D.. “Tests of the Multi-Period Two-Parameter Model.” Journal of Financial Economics, vol. 1 (March 1974), pp. 43–66.CrossRefGoogle Scholar
[6]Jensen, M. C. “Capital Markets: Theory and Evidence.” Bell Journal of Economics and Management Science, vol. 3 (Autumn 1972), pp. 357–398.Google Scholar
[7]Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolio and Capital Budgets.” The Review of Economics and Statistics, vol. 47 (February 1965), pp. 13–37.CrossRefGoogle Scholar
[8]Long, J. B. Jr., “Stock Prices, Inflation, and Term Structure of Interest Rates.” Journal of Financial Economics, vol. 1 (July 1974), pp. 131–170.CrossRefGoogle Scholar
[9]Mossin, J. “Equilibrium in a Capital Asset Market.” Econometrica, vol. 34 (October 1966), pp. 768–783.CrossRefGoogle Scholar
[10]Roll, R. “Assets, Money and Commodity Price Inflation under Uncertainty.” Journal of Money, Credit and Banking, vol. 5 (November 1973), pp. 903–923.CrossRefGoogle Scholar
[11]Rubinstein, M. “A Mean–Variance Synthesis of Corporate Finance.” Journal of Finance, vol. 28 (March 1973), pp. 167–181.Google Scholar
[12]Sharpe, W. F. “Capital Asset Prices: A Theory of Market Equilibrium under Risk.” Journal of Finance, vol. 19 (September 1964), pp. 425–442.Google Scholar
[13]Stevens, G. “Two Problems in Portfolio Analysis: Conditional and Multiplicative Random Variables.” Journal of Financial and Quantitative Analysis, vol. 6 (December 1971), pp. 1235–1250.CrossRefGoogle Scholar