Inherent Efficiency, Security Markets, and the Pricing of Investment Strategies

Liang Zou ()
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Liang Zou: University of Amsterdam

No 00-108/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper applies the dichotomous theory of choice by Zou (2000a) tothe analysis of investmentstrategies and security markets. Issues concerning individualoptimality, (approximate) arbitrage,capital market equilibrium, and Pareto efficiency are studied undervarious market conditions. Among the main results area unique dichotomous pricing model,unifying and generalizing theexisting models, that can be used for pricing any financialsecurities under both complete andincomplete markets,conditions for individual optimality thathold for general utilities(including expected utility as a special case),the existence and uniqueness of capital marketequilibrium, andimplications of capital market equilibrium,including a separation theorem,inherent efficiency of the market portfolio, Pareto efficiency, andseveral testable hypotheses thatpredict securities' equilibrium up-market potentials and down-marketpotentials, respectively.

Keywords: Perception of reward and risk; Reward-risk utility; Inherent efficiency; Quasi-complete market; Dichotomous pricing model; Approximate arbitrage; Up-market and Down-market potentials (search for similar items in EconPapers)
JEL-codes: D46 D81 G10 G11 G12 (search for similar items in EconPapers)
Date: 2000-12-05
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Citations: View citations in EconPapers (1)

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