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Conditions Ensuring the Separability of Asset Demand for All Risk-Averse Investors

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  • Kaïs Dachraoui
  • Georges Dionne

Abstract

We explore how the demand for a risky asset can be separated into an investment effect and a hedging effect by all risk-averse investors. This question has been shown to be complex when considered outside of the mean-variance framework. We restrict dependence among returns on the risky assets to regression dependence and find that the demand for one risky asset can be decomposed into an investment component based on the risk premium offered by the asset and a hedging component used against fluctuations in the return on the other risky asset. We also show that the class of regression dependent distributions is larger than that of two-fund separating distributions. This conclusion opens up the search for broader distributional hypotheses suitable to asset-pricing models. Examples are discussed.

Suggested Citation

  • Kaïs Dachraoui & Georges Dionne, 2004. "Conditions Ensuring the Separability of Asset Demand for All Risk-Averse Investors," Cahiers de recherche 0411, CIRPEE.
    • Handle: RePEc:lvl:lacicr:0411
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    References listed on IDEAS

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    2. Stephen A. Ross, 2005. "Mutual Fund Separation in Financial Theory—The Separating Distributions," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 10, pages 309-356, World Scientific Publishing Co. Pte. Ltd..
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    7. Wei, K C John & Lee, Cheng F & Lee, Alice C, 1999. "Linear Conditional Expectation, Return Distributions, and Capital Asset Pricing Theories," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(4), pages 471-487, Winter.
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    9. DENUIT, Michel & SAILLET, Olivier, 2001. "Nonparametric Tests for Positive Quadrant Dependence," LIDAM Discussion Papers IRES 2001009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 01 Apr 2001.
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    Cited by:

    1. Marie-Claude Beaulieu & Jean-Marie Dufour & Lynda Khalaf, 2005. "Exact Multivariate Tests of Asset Pricing Models with Stable Asymmetric Distributions," Springer Books, in: Michèle Breton & Hatem Ben-Ameur (ed.), Numerical Methods in Finance, chapter 0, pages 173-191, Springer.
    2. Georges Dionne & Jingyuan Li, 2012. "Comparative Ross Risk Aversion in the Presence of Quadrant Dependent Risks," Cahiers de recherche 1226, CIRPEE.

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    More about this item

    Keywords

    Portfolio choice; investment effect; hedging effect; regression dependence; two-fund separation; asset-pricing model; copulas;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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