Consistent Market Extensions under the Benchmark Approach
The existence of the growth optimal portfolio (GOP), also known as Kelly portfolio, is vital for a financial market to be meaningful. The GOP, if it exists, is uniquely determined by the market parameters of the primary security accounts. However, markets may develop and new security accounts become tradable. What happens to the GOP if the original market is extended? In this paper we provide a complete characterization of market extensions which are consistent with the existence of a GOP. We show that a three fund separation theorem applies for the extended GOP. This includes, in particular, the introduction of a locally risk free security, the savings account. We give necessary and sufficient conditions for a consistent exogenous specification of the prevailing short rates.
|Date of creation:||01 Jan 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Long, John Jr., 1990. "The numeraire portfolio," Journal of Financial Economics, Elsevier, vol. 26(1), pages 29-69, July.
- Eckhard Platen, 2004.
"A Benchmark Approach to Finance,"
Research Paper Series
138, Quantitative Finance Research Centre, University of Technology, Sydney.
- Dirk Becherer, 2001. "The numeraire portfolio for unbounded semimartingales," Finance and Stochastics, Springer, vol. 5(3), pages 327-341.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:189. 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: (Duncan Ford)
If references are entirely missing, you can add them using this form.