A three-period extension of the CAPM

Abstract

PurposeOur result of this paper aims to indicate that the beta pricing formula could be applied in a long-term model setting as well.Design/methodology/approachIn this paper, we show that the capital asset pricing model can be derived from a three-period general equilibrium model.FindingsWe show that our extended model yields a Pareto efficient outcome.Practical implicationsThe capital asset pricing model (CAPM) model can be used for pricing long-lived assets.Social implicationsLong-term modelling and sustainability can be modelled in our setting.Originality/valueOur results were only known for two periods. The extension to 3 periods opens up a large scope of applicational possibilities in asset pricing, behavioural analysis and long-term efficiency.