Journal Article

Stochastic Dominance, Pareto Optimality, and Equilibrium Asset Pricing

Chongmin Kim

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 65, issue 2, pages 341-356
Published in print April 1998 | ISSN: 0034-6527
Published online April 1998 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00047
Stochastic Dominance, Pareto Optimality, and Equilibrium Asset Pricing

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This paper introduces the concept of a factor subspace in competitive equilibrium asset pricing. A factor subspace contains the market portfolio and is such that every marketed contingent claim is second-order stochastically dominated by a claim from the factor subspace. Conditions are given for the existence of equilibrium, and it is shown how APT and CAPM can be interpreted in the framework of the paper. If sufficiently many call options on the market portfolio are traded, then the space spanned by these options can be used as the factor subspace.

Journal Article.  0 words. 

Subjects: Economics

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