Management Science and Financial Engineering
- Volume 2 Issue 1
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- Pages.73-101
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- 1996
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- 2287-2043(pISSN)
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- 2287-2361(eISSN)
The Factor Space in Financial Markets
- Geanakoplos, John (Cowles Foundation, Yale University) ;
- Oh, Gyutaeg (College of Business Administration, Chung-Ang University)
- Published : 1996.12.01
Abstract
We show assets can be classified into diversifiable risks and non-diversifiable risks based on aggregate endowment and spanning so that in equilibrium agents eliminate diversifiable risks which must have zero values. Consequently, the benchmark portfolio that represents a pricing operator should have only a non-diversifiable risk, aggregate endowment should earn a positive risk premium over a riskless asset, and, even in incomplete markets, there should be a pricing operator represented by a function of aggregate endowment if any asset mean-independent of aggregate endowment is diversifiable. These results apply to both the CAPM and a representative agent model.
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