Capital market equilibrium with heterogeneous investors

Haim Shalit and Shlomo Yitzhaki

Quantitative Finance, 2009, vol. 9, issue 6, 757-766

Abstract: As a two-parameter model that satisfies stochastic dominance, the mean-extended Gini model is used to build efficient portfolios. The model quantifies risk aversion heterogeneity in capital markets. In a simple Edgeworth box framework, we show how capital market equilibrium is achieved for risky assets. This approach provides a richer basis for analysing the pricing of risky assets under heterogeneous preferences. Our main results are: (1) identical investors, who use the same statistic to represent risk, hold identical portfolios of risky assets equal to the market portfolio; and (2) heterogeneous investors as expressed by the variance or the extended Gini hold different risky assets in portfolios, and therefore no one holds the market portfolio.

Keywords: CAPM; Applied mathematical finance; Market efficiency; Stochastic dominance; Market portfolio (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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DOI: 10.1080/14697680902795226

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