Asset Price Distributions and Efficient Markets

Ricardo Fernholz and Caleb Stroup

Papers from arXiv.org

Abstract: We explore a decomposition in which returns on a large class of portfolios relative to the market depend on a smooth non-negative drift and changes in the asset price distribution. This decomposition is obtained using general continuous semimartingale price representations, and is thus consistent with virtually any asset pricing model. Fluctuations in portfolio relative returns depend on stochastic time-varying dispersion in asset prices. Thus, our framework uncovers an asset pricing factor whose existence emerges from an accounting identity universal across different economic and financial environments, a fact that has deep implications for market efficiency. In particular, in a closed, dividend-free market in which asset price dispersion is relatively constant, a large class of portfolios must necessarily outperform the market portfolio over time. We show that price dispersion in commodity futures markets has increased only slightly, and confirm the existence of substantial excess returns that co-vary with changes in price dispersion as predicted by our theory.

Date: 2018-10
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://arxiv.org/pdf/1810.12840 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1810.12840

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().