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

Kaïs Dachraoui and Georges Dionne ()

Cahiers de recherche from CIRPEE

Abstract: We explore how the demand for a risky asset can be separated 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. We restrict dependence among returns on the risky assets to regression dependence and find 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 fluctuations in the return on the other risky asset. We also show that the class of regression dependent distributions is larger than that of two-fund separating distributions. This conclusion opens up the search for broader distributional hypotheses suitable to asset-pricing models. Examples are discussed.

Keywords: Portfolio choice; investment effect; hedging effect; regression dependence; two-fund separation; asset-pricing model; copulas (search for similar items in EconPapers)
JEL-codes: D80 G10 G11 G12 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0411

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