Exact Arbitrage Well-Diversified Potfolios and Asset Pricing in Large Markets

M. Khan and Yeneng Sun ()

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: For market with an atomless continuum of assets, we formulate the intuitive idea of a "well-diversified" portfolio, and present a notion of "exact arbitrage", strictly weaker than the more conventional notion of "asymptotic arbitrage", and necessary and sufficient for the validity of an APT pricing formula. One formula involves "essential" risk based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets.

Date: 2002-10
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Related works:
Journal Article: Exact arbitrage, well-diversified portfolios and asset pricing in large markets (2003)
Working Paper: Exact arbitrage, well-diversified portfolios and asset pricing in large markets (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:jhu:papers:483

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