Do CAPM results hold in a dynamic economy? a numerical analysis

Abstract

In this research we use the projection method (reported by Judd) to find numerical solutions to the Euler equations of a stochastic dynamic growth model. The model that we solve is Brock's asset pricing model for a variety of parameterizations of the production functions. Using simulated data from the model, conjectures (which are not analytically tractable) can be verified. We show that the market portfolio is mean-variance efficient in this dynamic context. We also show a result that is not available from the static CAPM theory: the efficient frontier shifts up and down over the business cycle.