The Significance of the Market Portfolio
AbstractThe market portfolio (world portfolio) is in one sense a least important portfolio to provide to investors; there is always a better portfolio for social planners to make available to them. In a J-agent one-period stochastic endowment economy, where preferences are quadratic, the market portfolio is never spanned by the optimal markets a social planner would create. With identical preferences, the market portfolio is orthogonal to all J - 1 portfolios which achieve a first best solution. These conclusions rely on the assumption that the social planner has perfect information about agents' utilities. We also show that as the contract designer's information about agents' utilities becomes more imperfect, the optimal contracts approach contracts that weight individual endowments in proportion to elements of eigenvectors of the variance matrix of endowments. If there is a substantial market component to endowments than a social planner, for reasons of robustness and simplicity, may conclude that creating a contract to allow trading the market portfolio would be a significant innovation.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1154.
Length: 32 pages
Date of creation: Jun 1997
Date of revision:
Publication status: Published in The Review of Financial Studies (Summer 2000), 13(2): 301-329
Note: CFP 997.
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Robert J. Shiller & Stefano Athanasoulis, 2001. "The Significance of the Market Portfolio," Yale School of Management Working Papers ysm133, Yale School of Management.
- Stefano Athanasoulis & Robert J. Shiller, 1997. "The Significance of the Market Portfolio," NBER Technical Working Papers 0209, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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