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Conditions Ensuring the Separability of Asset Demand for All Risk-Averse Investors

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Author Info
Kaïs Dachraoui
Georges Dionne

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Abstract

We explore how the demand for a risky asset can be separated into an investment effect and a hedging effect by all risk-averse investors. This question has been shown to be complex when considered outside of the mean-variance framework. We restrict dependence among returns on the risky assets to regression dependence and find that the demand for one risky asset can be decomposed into an investment component based on the risk premium offered by the asset and a hedging component used against fluctuations in the return on the other risky asset. We also show that the class of regression dependent distributions is larger than that of two-fund separating distributions. This conclusion opens up the search for broader distributional hypotheses suitable to asset-pricing models. Examples are discussed.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0411.

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Date of creation: 2004
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Handle: RePEc:lvl:lacicr:0411

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Related research
Keywords: Portfolio choice; investment effect; hedging effect; regression dependence; two-fund separation; asset-pricing model; copulas;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dufour, Jean-Marie & Beaulieu, Marie-Claude & Khalaf, Lynda, 2003. "Testing mean-variance efficiency in CAPM with possibly non-gaussian errors: an exact simulation-based approach," Discussion Paper Series 1: Economic Studies 2003,01, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  2. Elton, Edwin J. & Gruber, Martin J., 2000. "The Rationality of Asset Allocation Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 27-41, March. [Downloadable!]
  3. DENUIT, Michel & SAILLET, Olivier, 2001. "Nonparametric Tests for Positive Quadrant Dependence," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 01 Apr 2001. [Downloadable!]
  4. Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
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  5. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. BEAULIEU, Marie-Claude & DUFOUR, Jean-Marie & KHALAF, Lynda, 2005. "Exact Multivariate Tests of Asset Pricing Models with Stable Asymmetric Distributions," Cahiers de recherche 2005-04, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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