Exact Arbitrage Well-Diversified Potfolios 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 InfoPaper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 483.
Date of creation: Oct 2002
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- Khan, M. Ali & Sun, Yeneng, 2003. "Exact arbitrage, well-diversified portfolios and asset pricing in large markets," Journal of Economic Theory, Elsevier, vol. 110(2), pages 337-373, June.
- 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).
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