A note on the existence of CAPM equilibria with homogeneous cumulative prospect theory preferences

Abstract

This note identifies and fixes a minor gap in Proposition 1 in Barberis and Huang (Am Econ Rev 98(5):2066-2100, 2008. Assuming homogeneous cumulative prospect theory decision makers, we show that CAPM is a necessary (though not sufficient) condition that must hold in equilibrium. We support our results with numerical examples where security prices become negative.