Market Price of Risk in the CAPM with Non-Tradable Endowments

Abstract

In the Capital Asset Pricing Model, we consider how introducing new tradable assets into markets will affect the prices of the existing ones. We prove that introducing new tradable assets decreases the market price of risk if the elasticity of the marginal rates of substitution of the mean for standard deviation with respect to the latter is greater than one for every consumer; the market price of risk increases if the elasticity is less than one; and the market price of risk is left unchanged if the elasticity is equal to one. The proof is based on the intermediate value theorem.