Consistent mean-variance preferences
Mean-variance utility functions exhibiting a certain set of properties underpin a large body of financial and economic theories. This paper provides a firm choice-theoretic foundation for such a function. Under the assumption that preferences over distributions are utility-representable, we show that the preferences can be represented by a differentiable mean-variance utility function if and only if the preference functional is L p-Fréchet differentiable (for ) and the local utility function is quadratic for all distributions. Assuming the conditions for such a mean-variance utility function, we further identify easily interpretable necessary and sufficient conditions on the preferences for each of the properties that the mean-variance utility function is commonly assumed to exhibit in applications of the mean-variance approach. In the light of the characterizations, it is also shown that the apparent inconsistency demonstrated by Borch in a mean-variance model can be ruled out by appropriate restrictions on the mean-variance utility function. Copyright 2011 Oxford University Press 2010 All rights reserved, Oxford University Press.
Volume (Year): 63 (2011)
Issue (Month): 2 (April)
|Contact details of provider:|| Postal: |
Fax: 01865 267 985
Web page: http://oep.oupjournals.org/
|Order Information:||Web: http://www.oup.co.uk/journals|
When requesting a correction, please mention this item's handle: RePEc:oup:oxecpp:v:63:y:2011:i:2:p:398-418. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.