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Ordered Mean Difference Benchmarking, Utility Generators and Capital Market Equilibirium

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  • Bowden, Roger

Abstract

Originally designed as a fund performance measure, the ordered mean difference construction is extended to characterise zero surplus situations such as a capital market equilibrium generated by arbitrary risk preferences. This enables non parametric testing for whether CAPM applies and the detection of pricing inefficiences 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 profile or 'gnomic' utility functions, which collectively generate the OMD areas. The risk profile of the investor can be summarised in terms of a representative gnome, as can the market risk premium. Pricing efficiency turns on whether such a representative gnome exists.

Suggested Citation

  • Bowden, Roger, 2003. "Ordered Mean Difference Benchmarking, Utility Generators and Capital Market Equilibirium," Working Paper Series 33493, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:33493
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/33493
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