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The Significance of the Market Portfolio

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  • Stefano Athanasoulis
  • Robert J. Shiller

Abstract

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.

Suggested Citation

  • Stefano Athanasoulis & Robert J. Shiller, 1997. "The Significance of the Market Portfolio," NBER Technical Working Papers 0209, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0209
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    Cited by:

    1. Athanasoulis, S. & Shiller, R.J., 1995. "World Income Components: Measuring and Exploting International Risk Sharing Opportunities," Papers 725, Yale - Economic Growth Center.
    2. G. Glenn Baigent & William Acar, 2015. "On the economic significance of the benchmark portfolio," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 3(6), pages 16-25, December.
    3. Calvet, Laurent & Gonzalez-Eiras, Martín & Sodini, Paolo, 2004. "Financial Innovation, Market Participation, and Asset Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(3), pages 431-459, September.
    4. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    5. Miklós Koren, 2003. "Financial Globalization, Portfolio Diversification, and the Pattern of International Trade," IMF Working Papers 2003/233, International Monetary Fund.
    6. Mark J. Kamstra & Robert J. Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Cowles Foundation Discussion Papers 1717, Cowles Foundation for Research in Economics, Yale University.
    7. Maria Giduskova & Borja Larrain, 2006. "International risk-taking, volatility, and consumption growth," Communities and Banking, Federal Reserve Bank of Boston.
    8. Bisin, Alberto & Acharya, Viral, 2002. "Entrepreneurial Incentives in Stock Market Economies," CEPR Discussion Papers 3474, C.E.P.R. Discussion Papers.
    9. Bossaerts, Peter & Fine, Leslie & Ledyard, John, 2002. "Inducing liquidity in thin financial markets through combined-value trading mechanisms," European Economic Review, Elsevier, vol. 46(9), pages 1671-1695, October.
    10. Viral V. Acharya & Alberto Bisin, 2005. "Optimal Financial-Market Integration and Security Design," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2397-2434, November.
    11. Shiller, Robert J., 1999. "Social security and institutions for intergenerational, intragenerational, and international risk-sharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 165-204, June.
    12. Robert J. Shiller, 1997. "Expanding the Scope of Individual Risk Management: Moral Hazard and Other Behavioral Considerations," Cowles Foundation Discussion Papers 1145, Cowles Foundation for Research in Economics, Yale University.
    13. Stefano G. Athanasoulis & Robert J. Shiller, 2001. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," American Economic Review, American Economic Association, vol. 91(4), pages 1031-1054, September.
    14. Graham, Liam & Wright, Stephen, 2010. "Information, heterogeneity and market incompleteness," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 164-174, March.
    15. Mark J. Kamstra & Robert J. Shiller, 2009. "The Case for Trills: Giving the People and Their Pension Funds a Stake in the Wealth of the Nation," Cowles Foundation Discussion Papers 1717, Cowles Foundation for Research in Economics, Yale University.
    16. Meryem Masmoudi & Fouad Ben Abdelaziz, 2018. "Portfolio selection problem: a review of deterministic and stochastic multiple objective programming models," Annals of Operations Research, Springer, vol. 267(1), pages 335-352, August.
    17. Athanasoulis, Stefano G. & Shiller, Robert J., 2002. "Defining residual risk-sharing opportunities: Pooling world income components," Research in Economics, Elsevier, vol. 56(1), pages 61-84, June.
    18. Rampini, Adriano A. & Viswanathan, S., 2018. "Financing Insurance," CEPR Discussion Papers 12855, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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