Risk-Value Efficient Portfolios and Asset Pricing
Guenther Franke and
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Guenther Franke: Universität Konstanz, Postal: D - 78457 Konstanz
No 97-32, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim
Portfolio choice is usually modelled by von Neumann-Morgenstern utility. Risk-value models are more general and permit the derivation of risk-value efficient frontiers. A behaviourally based risk measure with an endogenous or exogenous benchmark is used to derive effcient portfolios and to analyse the implied equilibrium asset pricing. In risk-value models a richer set of sharing rules is obtained than in a von Neumann-Morgenstern world. Linear sharing rules are obtained only for quadratic risk functions. If the risk function is modelled by a negative HARA-function, then sharing rules are convex or concave relative to each other. Hence, agents buy and sell portfolio insurance motivating trade in options. Asset pricing, however, is similar to that in a von Neumann-Morgenstern world.
Note: We like to thank Yakov Amihud, New York, Thomas Langer, Mannheim, James Smith, Duke University, Meir Stratman, Santa Barbara, and the members of the Finance seminar at Vienna University and Tel Aviv University for many helpful suggestions which have led to considerable improvement of the paper. Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Working Paper: Risk-value efficient portfolios and asset pricing (1997)
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