The Ability to ''Outperform the Market'': Logical Foundations based on the Theory of Rational Beliefs
Is it theoretically legitimate for an investor to attempt to outperform the market index? Or is the investor simply deluding himself? The purpose of this paper is to apply the new Theory of Rational Beliefs (RB) to demonstrate the following result: Even when all agents have symmetric information, there exist three canonical strategies in an RB environment that make it theoretically legitimate to try to outperform the market. More specifically, while the three strategies that we will identify are not directly implied by RB theory which is a positive theory, the strategies are logically compatible with RB theory when interpreted in a normative manner from the standpoint of an individual agent attempting to exploit the existence of structural change in the environment. This is what we mean by the claim that the proposed strategies are «theoretically legitimate». Moreover, we propose that these three strategies are canonical in the sense that all theoretically legitimate strategies for outperforming the market (including all successful hedge fund strategies that we know of) are combinations of these three basic strategies.
Volume (Year): 115 (2007)
Issue (Month): 3 ()
|Contact details of provider:|| |
When requesting a correction, please mention this item's handle: RePEc:vep:journl:y:2007:v:115:i:3:p:365-402. 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: (Vep - Vita e Pensiero)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.