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Mean‐variance efficiency of the market portfolio and futures trading
Author(s) -
Lioui Abraham,
Poncet Patrice
Publication year - 2001
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/1096-9934(200104)21:4<329::aid-fut2>3.0.co;2-s
Subject(s) - portfolio , futures contract , market portfolio , economics , mutual fund separation theorem , financial economics , variance (accounting) , cash , capital asset pricing model , econometrics , replicating portfolio , capital market line , portfolio optimization , finance , accounting , paleontology , horse , stock market , market depth , biology
Abstract We derived an intertemporal capital asset pricing model in which the mean‐variance efficiency of the market portfolio is neither a necessary nor a sufficient condition. We obtained this result by modeling a frictionless, continuously open financial market in which nonredundant futures contracts are available for trade, in addition to cash assets. Introducing such contracts modifies the way investors optimally allocate their wealth. Their portfolios then comprise the riskless asset, a perturbed mean‐variance‐efficient portfolio of cash assets, and a perturbed mean‐variance‐efficient portfolio of futures contracts. Furthermore, a (3 + K ) mutual fund separation is obtained, with K being the number of economic state variables, in lieu of the usual (2 + K ) fund separation. Mean‐variance efficiency of the market portfolio is a necessary condition only when cash assets are the sole traded assets. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:329–346, 2001