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

Sofiane Aboura and Emmanuel Lépinette-Denis
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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

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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.

Keywords: Modigliani-Miller; Markowitz; Capital structure; Regulation (search for similar items in EconPapers)
Date: 2017-05-23
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01526353

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