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Why the Market's Participants in the Modigliani-Miller Model are Markowitz Rational?

Author

Listed:
  • Sofiane Aboura

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • Emmanuel Lépinette-Denis

    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

The seminal works of Modigliani-Miller and Markowitz-Sharpe remain the cornerstone of financial theory. We reconcile these seemingly distinct approaches, in a unified theorem, by showing that the agents acting on the market defined by Modigliani-Miller are Markowitz rational when deriving the arbitrage reasoning in terms of Sharpe ratios. As a main policy implication, we show that government guarantees modify market's equilibrium as they provoke arbitrage opportunities.

Suggested Citation

  • Sofiane Aboura & Emmanuel Lépinette-Denis, 2017. "Why the Market's Participants in the Modigliani-Miller Model are Markowitz Rational?," Working Papers hal-01526353, HAL.
    • Handle: RePEc:hal:wpaper:hal-01526353
    as

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