The evolution of capital asset pricing models: Update and extension

Since Sharpe (1964) derived the CAPM, it has been the benchmark of asset pricing models and has been used to calculate the cost of equity capital and other asset pricing determinations for more than four decades. Many researchers have tried to relax the original assumptions and generalize the static CAPM. In addition, Merton (1973) and Black (1976) have generalized the static CAPM in terms of intertemporal CAPM. In this chapter, we survey the important alternative theoretical models of capital asset pricing and provide a complete review of the evolution of both static and intertemporal asset pricing models. We also discuss the interrelationships among these models and suggest several possible directions for future research. In addition, we review the asset pricing tests in terms of individual companies’ data instead of portfolio data. Our results might be used as a guideline for future theoretical and empirical research in capital asset pricing.