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Ordered Mean Difference Benchmarking, Utility Generators, and Capital Market Equilibrium


  • Roger J. Bowden

    (Victoria University of Wellington, New Zealand)


Designed as a fund performance measure, the ordered mean difference is extended to characterize zero-surplus situations, such as a capital market equilibrium generated by arbitrary risk preferences. This enables nonparametric testing for whether CAPM applies and the detection of pricing inefficiencies or anomalies from historical data, including international capital market segmentation. Any risk-averse utility function can be decomposed into a weighted average of elementary put option profiles ("gnomic" utility functions), which collectively generate the OMD areas. The investor's risk profile can be summarized as a representative gnome, so can the market risk premium. Pricing efficiency turns on whether such a representative gnome exists.

Suggested Citation

  • Roger J. Bowden, 2005. "Ordered Mean Difference Benchmarking, Utility Generators, and Capital Market Equilibrium," The Journal of Business, University of Chicago Press, vol. 78(2), pages 441-468, March.
  • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:441-468

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    References listed on IDEAS

    1. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-877, October.
    2. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    3. Bengt Holmstrom & Joan Ricart i Costa, 1986. "Managerial Incentives and Capital Management," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 835-860.
    4. Persons, John C., 1997. "Liars Never Prosper? How Management Misrepresentation Reduces Monitoring Costs," Journal of Financial Intermediation, Elsevier, vol. 6(4), pages 269-306, October.
    5. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-770, September.
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    Cited by:

    1. Roger Bowden, 2006. "The generalized value at risk admissible set: constraint consistency and portfolio outcomes," Quantitative Finance, Taylor & Francis Journals, vol. 6(2), pages 159-171.

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