Diversified Portfolios in Continuous Time
AbstractWe study a financial market containing an infinite number of assets, where each asset price is driven by an idiosyncratic random source as well as by a systematic noise term. Introducing 2 asymptotic assets" which correspond to certain infinitely well diversified portfolios we study absence of (asymptotic) arbiytrage, and in this context we obtain continuous time extensions of atemporal APT results. We also study completeness and derivative pricing, showing that the possibility of forming infinitely well diversified portfolios has the property of completing the market. It also turns out that models where the all risk is of diffusion type are qualitatively quite different from models where one risk is of diffusion type and the other is of Poisson type. We also present a simple martingale based theory for absence of asymptotic arbitrage.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 122.
Length: 28 pages
Date of creation: Sep 1996
Date of revision:
Publication status: Published in European Finance Review, 1998, pages 361-387.
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More information through EDIRC
Large economies; diversifiable risk; APT; asymptotic arbitrage; completeness; martingales;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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