The Significance of the Market Portfolio / Stefano Athanasoulis, Robert J. Shiller.

Format:

Book

Author/Creator:

Athanasoulis, Stefano.

Contributor:

National Bureau of Economic Research.

Shiller, Robert J.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0209.

NBER technical working paper series no. t0209

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

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.

Notes:

Print version record

February 1997.