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On investor preferences and mutual fund separation

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  • Dybvig, Philip
  • Liu, Fang

Abstract

We extend Cass and Stiglitz's analysis of preference-based mutual fund separation. We provide a complete characterization of the general K-fund separation. We show that some instances of separation with many funds can be constructed by adding inverse marginal utility functions having separation with one or a few funds. We also show that there is money separation (in which we can choose the riskless asset as one of the funds) if and only if there is a fund (which may or may not be the riskless asset) with a constant allocation as wealth changes. In general, we do not know how to write the separating utility functions in closed form, but we can do so in the special case of SAHARA utility defined by Chen et al. and for a new class of GOBI preferences introduced here.

Suggested Citation

  • Dybvig, Philip & Liu, Fang, 2018. "On investor preferences and mutual fund separation," Journal of Economic Theory, Elsevier, vol. 174(C), pages 224-260.
    • Handle: RePEc:eee:jetheo:v:174:y:2018:i:c:p:224-260
    DOI: 10.1016/j.jet.2017.12.006
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    References listed on IDEAS

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    1. Stephen A. Ross, 2005. "Mutual Fund Separation in Financial Theory—The Separating Distributions," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 10, pages 309-356, World Scientific Publishing Co. Pte. Ltd..
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    3. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Toru Igarashi, 2019. "An Analytic Market Condition for Mutual Fund Separation: Demand for the Non-Sharpe Ratio Maximizing Portfolio," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(2), pages 169-185, June.

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    More about this item

    Keywords

    Mutual fund separation; Investor preference; Money separation; Inverse marginal utility;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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