Conditions Ensuring the Decomposition of Asset Demand for All Risk-Averse Investors

Kais Dachraoui and Georges Dionne ()

The European Journal of Finance, 2007, vol. 13, issue 5, 397-404

Abstract: The paper explores how the demand for a risky asset can be decomposed into an investment effect and a hedging effect by all risk-averse investors. This question has been shown to be complex when considered outside of the mean-variance framework. Dependence among returns on the risky assets is restricted to quadrant dependence and it is found that the demand for one risky asset can be decomposed into an investment component based on the risk premium offered by the asset and a hedging component used against the fluctuations in the return on the other risky asset. The paper also discusses how the class of quadrant-dependent distributions is related to that of two-fund separating distributions. This contribution opens up the search for broader distributional hypotheses suitable to asset demand models. Examples are discussed.

Keywords: Portfolio choice; investment effect; hedging effect; quadrant dependence; two-fund separation; Asset demand model (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (9)

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Working Paper: Conditions ensuring the decomposition of asset demand for all risk-averse investors (2006)
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DOI: 10.1080/13518470601025326

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