Post by Sapphire Capital on Jul 14, 2008 20:21:15 GMT 4
Portfolio Selection with Monotone Mean-Variance Preferences
FABIO MACCHERONI
Università Bocconi - Istituto di Metodi Quantitativi
MASSIMO MARINACCI
University of Turin - Department of Statistics and Applied Mathematics
ALDO RUSTICHINI
University of Minnesota - Twin Cities - Department of Economics
MARCO TABOGA
Bank of Italy
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April 30, 2008
Bank of Italy Temi di Discussione (Working Paper) No. 664
Abstract:
We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1148724_code606534.pdf?abstractid=1148724&mirid=1
FABIO MACCHERONI
Università Bocconi - Istituto di Metodi Quantitativi
MASSIMO MARINACCI
University of Turin - Department of Statistics and Applied Mathematics
ALDO RUSTICHINI
University of Minnesota - Twin Cities - Department of Economics
MARCO TABOGA
Bank of Italy
--------------------------------------------------------------------------------
April 30, 2008
Bank of Italy Temi di Discussione (Working Paper) No. 664
Abstract:
We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1148724_code606534.pdf?abstractid=1148724&mirid=1