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The Stationary Distribution of Returns and Portfolio Separation in Capital Markets: A Fundamental Contradiction

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  • Rosenberg, Barr
  • Ohlson, James A.

Abstract

In a general equilibrium model of risky assets, prices would be determined by the interaction of the supply and demand. Unpredictable events would impact one or both sides of the asset market and thereby influence the return on assets. The probability distribution of returns would thus be endogenous. Since expectations as to subsequent asset returns influence asset demand, the probability distribution of returns is a crucial element in the general equilibrium system; it is the consequence of the demand and supply of assets and, at the same time, a central determinant of expectations and, hence, of the demand for assets. Nevertheless, it is possible to undertake a partial equilibrium analysis in which the behavior of asset demand, conditional upon a postulated probability distribution of returns, is examined. In such a limited context, it is natural to postulate a “convenient” probability distribution of returns, namely, one that facilitates the analysis of demand. A leading assumption has been that returns are serially independent and obey a stationary distribution.

Suggested Citation

  • Rosenberg, Barr & Ohlson, James A., 1976. "The Stationary Distribution of Returns and Portfolio Separation in Capital Markets: A Fundamental Contradiction," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(3), pages 393-402, September.
    • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:03:p:393-402_02
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    Cited by:

    1. Neharika Sobti, 2018. "Does Size, Value and Seasonal Effects Still Persist in Indian Equity Markets?," Vision, , vol. 22(1), pages 11-21, March.
    2. Ehling, Paul & Heyerdahl-Larsen, Christian, 2015. "Complete and incomplete financial markets in multi-good economies," Journal of Economic Theory, Elsevier, vol. 160(C), pages 438-462.
    3. Taufiq Choudhry, 2005. "September 11 and time-varying beta of United States companies," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1227-1242.
    4. Zan Yang, 2005. "Co‐integration of housing prices and property stock prices: evidence from the Swedish market," Journal of Property Research, Taylor & Francis Journals, vol. 22(1), pages 1-17, October.
    5. K. Giannopoulos, 1995. "Estimating the time Varying Components of international stock markets' risk," The European Journal of Finance, Taylor & Francis Journals, vol. 1(2), pages 129-164.
    6. Choudhry, Taufiq, 2005. "Time-varying beta and the Asian financial crisis: Evidence from Malaysian and Taiwanese firms," Pacific-Basin Finance Journal, Elsevier, vol. 13(1), pages 93-118, January.
    7. David Allen & Stephen Satchell & Colin Lizieri, 2024. "Quantifying the non-Gaussian gain," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 1-18, February.

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