The Significance of the Market Portfolio
AbstractThe market portfolio is in one sense the least important portfolio to provide to investors. In an J-agent one-period stochastic endowment economy, where preferences are quadratic, a social-welfare-minded contract designer would never create a contract that would allow trading the market portfolio. Even the complete set of contracts, all J 1 of them, which achieve a first best solution, never span the market portfolio. These conclusions rely on the assumption that the contract designer 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. Then, if there is a strong enough market component to endowments, a portfolio approximating the market portfolio may be the most important portfolio.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0209.
Date of creation: Feb 1997
Date of revision:
Publication status: published as Athanasoulis, S. G. and Robert J. Shiller. "The Significance Of The Market Portfolio," Review of Financial Studies, 2000, v13(2,Apr), 301-329.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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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 G. Athanasoulis & Robert J. Shiller, 1997. "The Significance of the Market Portfolio," Cowles Foundation Discussion Papers 1154, Cowles Foundation for Research in Economics, Yale University.
- G00 - Financial Economics - - General - - - General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-IFN-1998-08-21 (International Finance)
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