THE LOG-NORMAL ASSET PRICING MODEL (LAPM)

Allon Cohen and Haim Levy ()
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Allon Cohen: The School of Business Administration, The Hebrew University, Mt. Scopus, Jerusalem 91905, Israel
Haim Levy: The School of Business Administration, The Hebrew University, Mt. Scopus, Jerusalem 91905, Israel

Annals of Financial Economics (AFE), 2005, vol. 01, issue 01, 1-34

Abstract: We derive a discrete Log-Normal Asset Pricing Model (LAPM) based on log-normal distributed risky asset returns. Providing an analytical description of the efficient frontier in E(Log(R))-STD(Log(R)) space, we than show that under the log-normality of returns' assumption a segmented market equilibrium is created. The LAPM overcomes some of the drawbacks of the CAPM, hence better conforms with empirical observation; it shows how different portfolios of risky assets may be optimal for different investors; it shows why optimal portfolios may contain only a small number of risky assets, as well as why even with homogeneous expectations optimal portfolios for some investors may include risky assets held in short positions.

Keywords: Log-normal asset pricing model; asset returns; efficient frontier; optimal portfolios; mean-variance criterion; utility; G11; G12 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S2010495205500028

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