A short note on the problematic concept of excess demand in asset pricing models with mean-variance optimization
Franke, Reiner (2008) A short note on the problematic concept of excess demand in asset pricing models with mean-variance optimization. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.
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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
Referring to asset pricing models where demand is proportional to excess returns and said to be derived from a mean-variance optimization problem, the note formulates what probably is common knowledge but hardly ever made an explicit subject of discussion. This is an insufficient distinction between the desired holding of the risky asset on the part of the speculative agents, which is the solution to the optimization problem and usually directly presented as excess demand, and the desired change in this holding, which is what should reasonably constitute the excess demand on the market. The note arrives at the conclusion that in models with a market maker the story of the maximization of expected wealth should be dropped.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Assets (Accounting), Prices -- Mathematical models, Maximum principles (Mathematics), Mathematical optimization, Demand (Economic theory)|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Number of Pages:||11|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Sixth Framework Programme (European Commission) (FP6)|
|Grant number:||516446 (SFP)|
|References:||Franke, R. and Asada, T. (2008), “Incorporating positions into asset pricing models with order-based strategies”, Working Paper, University of Kiel and Chuo University Tokyo. He, X.-Z. and Li, Y. (2007), “Power-law behaviour, heterogeneity, and trend chasing”, Journal of Economic Dynamics and Control, 31, 3396–3426. Hommes, C., Huang, H. andWang, D. (2005), “A robust rational route to randomness in a simple asset pricing model”, Journal of Economic Dynamics and Control, 29, 1043–1072.|
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