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Robustness of the Market Model

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  • Nielsen, Lars Tyge

Abstract

The market model specifies that the random vector of returns on risky assets is an affine function of the return on the market portfolio plus a residual which has zero conditional expectation given the return on the market. The model is important because of its intimate relation to distributional two-fund separation and the CAPM equation. This paper shows that the market model is robust to small changes in the asset supplies only if the distribution of returns is spherically generated.

Suggested Citation

  • Nielsen, Lars Tyge, 1993. "Robustness of the Market Model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 365-369, April.
    • Handle: RePEc:spr:joecth:v:3:y:1993:i:2:p:365-69
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