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The Log-Normal Asset Pricing Model (Lapm)

Author

Listed:
  • ALLON COHEN

    (The School of Business Administration, The Hebrew University, Mt. Scopus, Jerusalem 91905, Israel)

  • HAIM LEVY

    (The School of Business Administration, The Hebrew University, Mt. Scopus, Jerusalem 91905, Israel)

Abstract

We derive a discrete Log-Normal Asset Pricing Model (LAPM) based on log-normal distributed risky asset returns. Providing an analytical description of the efficient frontier in E(Log(R))-STD(Log(R)) space, we than show that under the log-normality of returns' assumption a segmented market equilibrium is created. The LAPM overcomes some of the drawbacks of the CAPM, hence better conforms with empirical observation; it shows how different portfolios of risky assets may be optimal for different investors; it shows why optimal portfolios may contain only a small number of risky assets, as well as why even with homogeneous expectations optimal portfolios for some investors may include risky assets held in short positions.

Suggested Citation

  • Allon Cohen & Haim Levy, 2005. "The Log-Normal Asset Pricing Model (Lapm)," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-34.
    • Handle: RePEc:wsi:afexxx:v:01:y:2005:i:01:n:s2010495205500028
    DOI: 10.1142/S2010495205500028
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    References listed on IDEAS

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    1. Claus-Hennig Hanf & Rolf A. E. Müller, 1974. "Multiple job holding and leisure time," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 2(1), pages 87-93.
    2. Martinez, Daisy V. B., 1974. "O Rio de Janeiro e seus arredores em 1824," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 14(2), April.
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    Cited by:

    1. Moawia Alghalith & Xu Guo & Wing-Keung Wong & Lixing Zhu, 2016. "A General Optimal Investment Model In The Presence Of Background Risk," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-8, March.
    2. Goddard, John & Onali, Enrico, 2012. "Self-affinity in financial asset returns," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 1-11.

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    More about this item

    Keywords

    Log-normal asset pricing model; asset returns; efficient frontier; optimal portfolios; mean-variance criterion; utility; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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