Exact arbitrage, well-diversified portfolios and asset pricing in large markets
AbstractFor market with an atomless continuum of assets, we formulate the intuitive idea of a "well-diversified" portfolio, and present a notion of "exact arbitrage", strictly weaker than the more conventional notion of "asymptotic arbitrage", and necessary and sufficient for the validity of an APT pricing formula. One formula involves "essential" risk based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 110 (2003)
Issue (Month): 2 (June)
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Web page: http://www.elsevier.com/locate/inca/622869
Other versions of this item:
- Khan, M. Ali & Sun, Yeneng, 2001. "Exact Arbitrage, Well-Diversified Portfolios and Asset Pricing in Large Markets," Economics Working Papers (Ensaios Economicos da EPGE) 420, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- M Ali Khan & Yeneng Sun, 2002. "Exact Arbitrage Well-Diversified Potfolios and Asset Pricing in Large Markets," Economics Working Paper Archive 483, The Johns Hopkins University,Department of Economics.
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Papiers d'Economie MathÃÂ©matique et Applications
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