- Inherent Efficiency, Security Markets, and the Pricing of Investments Strategies
- Number of pages
- Amsterdam / Rotterdam: Tinbergen Institute
- Tinbergen Institute Discussion Paper
- Volume | Edition (Serie)
- TI 2000-108/2
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
This paper applies the dichotomous theory of choice by Zou (2000a) tothe analysis of investmentstrategies and security markets. Issues concerning individualoptimality, (approximate) arbitrage,capital market equilibrium, and Pareto efficiency are studied undervarious market conditions. Among the main results area unique dichotomous pricing model,unifying and generalizing theexisting models, that can be used for pricing any financialsecurities under both complete andincomplete markets,conditions for individual optimality thathold for general utilities(including expected utility as a special case),the existence and uniqueness of capital marketequilibrium, andimplications of capital market equilibrium,including a separation theorem,inherent efficiency of the market portfolio, Pareto efficiency, andseveral testable hypotheses thatpredict securities' equilibrium up-market potentials and down-marketpotentials, respectively.
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