Ann Oper Res
S.I.: RISK IN FINANCIAL ECONOMICS
An intertemporal capital asset pricing model
under incomplete information and short sales
· Detao Zhang
© Springer Science+Business Media, LLC, part of Springer Nature 2018
Abstract This paper provides the inter-temporal capital asset pricing model with incomplete
information and short sales constraints. We derive the general equilibrium market equation
and the security market line of the “classical” capital asset pricing model in continuous time
in the presence of incomplete information and short sales.
Keywords Inter-temporal capital asset pricing · Information uncertainty · Short sales
JEL Classiﬁcation G11 · G12
Merton (1973) develops an equilibrium model of the capital market.
Merton’s (1973) model states that the expected excess return on any asset is given by
a “multi-beta” version of the CAPM with the number of betas being equal to one plus the
number of state variables.
Breeden (1979) shows that Merton’s multi-beta pricing equation can collapse into a single
beta equation where the expected excess return on any security, is proportional to its beta,
with respect to aggregate consumption alone.
Merton (1987) develops a model of capital market equilibrium with incomplete informa-
tion, CAPMI, to provide some insights into the behavior of security prices. Information costs
have two components: the costs of gathering and processing data, and the costs of information
THEMA, University of Cergy-Pontoise, Cergy-Pontoise, France
ISC Paris Business School, Paris, France
School of Economics, Shandong University, Jinan, People’s Republic of China