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Aggregation, efficiency and mutual fund separation in incomplete markets

  • JÊrÆme B. Detemple

    (Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, H3A 1G5 and CIRANO, Montreal, H3A 2A5, CANADA)

  • Piero Gottardi

    (Dipartimento di Scienze Economiche, UniversitÁ CÁ Foscari di Venezia, I-30123 Venezia, ITALY)

This paper studies the conditions for aggregation, portfolio separation and effective completeness of competitive allocations in general equilibrium models with incomplete markets where agents have general preference and endowment distributions. We show that these properties are distinct. Demands may aggregate yet may fail to exhibit fund separation and conversely. Fund separation implies effective completeness while aggregation does not. The implications of these properties for the structure of equilibria are discussed, and generalizations of the CAPM, the consumption CAPM and the CAPM with nonmarketed wealth emerge from the analysis.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 11 (1998)
Issue (Month): 2 ()
Pages: 443-455

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Handle: RePEc:spr:joecth:v:11:y:1998:i:2:p:443-455
Note: Received: September 12, 1996; revised version: November 7, 1996
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  1. Michael Jerison, 2006. "Nonrepresentative Representative Consumers," Discussion Papers 06-08, University at Albany, SUNY, Department of Economics.
  2. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
  3. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  4. Mantel, Rolf R., 1976. "Homothetic preferences and community excess demand functions," Journal of Economic Theory, Elsevier, vol. 12(2), pages 197-201, April.
  5. Debreu, Gerard, 1974. "Excess demand functions," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 15-21, March.
  6. Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-56, December.
  7. Brennan, M. J. & Kraus, A., 1976. "The Geometry of Separation and Myopia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(02), pages 171-193, June.
  8. Thorsten Hens & Piero Gottardi, 1999. "Disaggregation of excess demand and comparative statics with incomplete markets and nominal assets," Economic Theory, Springer, vol. 13(2), pages 287-308.
  9. Milne, Frank, 1979. "Consumer Preferences, Linear Demand Functions and Aggregation in Competitive Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 407-17, July.
  10. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
  11. Bottazzi, Jean-Marc & Hens, Thorsten, 1996. "Excess Demand Functions and Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 68(1), pages 49-63, January.
  12. Ross, Stephen A., 1978. "Mutual fund separation in financial theory--The separating distributions," Journal of Economic Theory, Elsevier, vol. 17(2), pages 254-286, April.
  13. Lewbel, A. & Perraudin, W.R.M., 1992. "Mutual Fund Separation with General Preferences," Cambridge Working Papers in Economics 9212, Faculty of Economics, University of Cambridge.
  14. Lewbel, Arthur, 1989. "A Demand System Rank Theorem," Econometrica, Econometric Society, vol. 57(3), pages 701-05, May.
  15. Chipman, John S., 1974. "Homothetic preferences and aggregation," Journal of Economic Theory, Elsevier, vol. 8(1), pages 26-38, May.
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