The Significance of the Market Portfolio

Stefano Athanasoulis and Robert Shiller

No 209, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: The market portfolio is in one sense the least important portfolio to provide to investors. In an J-agent one-period stochastic endowment economy, where preferences are quadratic, a social-welfare-minded contract designer would never create a contract that would allow trading the market portfolio. Even the complete set of contracts, all J 1 of them, which achieve a first best solution, never span the market portfolio. These conclusions rely on the assumption that the contract designer has perfect information about agents' utilities. We also show that as the contract designer's information about agents' utilities becomes more imperfect, the optimal contracts approach contracts that weight individual endowments in proportion to elements of eigenvectors of the variance matrix of endowments. Then, if there is a strong enough market component to endowments, a portfolio approximating the market portfolio may be the most important portfolio.

JEL-codes: G00 G13 (search for similar items in EconPapers)
Date: 1997-02
New Economics Papers: this item is included in nep-ifn
Note: AP
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Citations: View citations in EconPapers (4)

Published as Athanasoulis, S. G. and Robert J. Shiller. "The Significance Of The Market Portfolio," Review of Financial Studies, 2000, v13(2,Apr), 301-329.

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Related works:
Working Paper: The Significance of the Market Portfolio (2001)
Journal Article: The Significance of the Market Portfolio (2000)
Working Paper: The Significance of the Market Portfolio (1997)
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