Conditions for a CAPM equilibrium with positive prices

Moshe Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

11 Scopus citations


This paper examines the conditions required to guarantee positive prices in the CAPM. Positive prices imply an upper bound on the equity premium. This upper bound depends on the degree of diversity of firms' fundamentals, and it is independent of investors' preferences. In economies with realistically diverse assets the only positive-price CAPM equilibrium theoretically possible is a degenerate one, with zero equity premium. Furthermore, when specific standard investors' preferences are assumed, the CAPM equilibrium with positive prices may be altogether impossible. A possible solution to these fundamental problems may be offered by the segmented-market version of the model.

Original languageAmerican English
Pages (from-to)404-415
Number of pages12
JournalJournal of Economic Theory
Issue number1
StatePublished - Nov 2007

Bibliographical note

Funding Information:
I am grateful to the anonymous referee for his insightful comments and suggestions. Financial support from the Zagagi Fund is thankfully acknowledged.


  • Capital asset pricing model
  • Equity premium
  • Positive prices
  • Segmented market


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