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Capital Market Equilibrium: The Mean-Gini Approach

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  • Haim Shalit

    (BGU)

  • Shlomo Yitzhaki

    (Hebrew University)

Abstract

As a two-parameter model that satisfies stochastic dominance, the mean-extended Gini model is used to build efficient portfolios. The model also quantifies risk aversion heterogeneity in capital markets. Using a simple Edgeworth box framework, we show how capital market equilibrium is achieved for risky assets. This approach provides a richer basis for analysis of the pricing of risky assets under heterogeneous preferences. Our main results are: (1) At equilibrium all mean-variance investors and homogeneous mean-Gini investors will hold portfolios of risky assets that are identical to the market portfolio; and (2) heterogeneous investors as expressed by the extended Gini hold different risky assets in portfolios, and no one must hold the market portfolio.

Suggested Citation

  • Haim Shalit & Shlomo Yitzhaki, 2005. "Capital Market Equilibrium: The Mean-Gini Approach," Working Papers 0522, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:0522
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    References listed on IDEAS

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