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Inherent Efficiency, Security Markets, and the Pricing of Investment Strategies

Author

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  • Liang Zou

    (University of Amsterdam)

Abstract

This paper applies the dichotomous theory of choice by Zou (2000a) tothe analysis of investmentstrategies and security markets. Issues concerning individualoptimality, (approximate) arbitrage,capital market equilibrium, and Pareto efficiency are studied undervarious market conditions. Among the main results area unique dichotomous pricing model,unifying and generalizing theexisting models, that can be used for pricing any financialsecurities under both complete andincomplete markets,conditions for individual optimality thathold for general utilities(including expected utility as a special case),the existence and uniqueness of capital marketequilibrium, andimplications of capital market equilibrium,including a separation theorem,inherent efficiency of the market portfolio, Pareto efficiency, andseveral testable hypotheses thatpredict securities' equilibrium up-market potentials and down-marketpotentials, respectively.

Suggested Citation

  • Liang Zou, 2000. "Inherent Efficiency, Security Markets, and the Pricing of Investment Strategies," Tinbergen Institute Discussion Papers 00-108/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20000108
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    File URL: https://papers.tinbergen.nl/00108.pdf
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    Cited by:

    1. Liang Zou, 2005. "Dichotomous Asset Pricing Model," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 185-207, May.

    More about this item

    Keywords

    Perception of reward and risk; Reward-risk utility; Inherent efficiency; Quasi-complete market; Dichotomous pricing model; Approximate arbitrage; Up-market and Down-market potentials;
    All these keywords.

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • 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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