Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85594
Authors: 
Zou, Liang
Year of Publication: 
2000
Series/Report no.: 
Tinbergen Institute Discussion Paper 00-108/2
Abstract: 
This paper applies the dichotomous theory of choice by Zou (2000a) tothe analysis of investmentstrategies and security markets. Issues concerning individualoptimality, (approximate) arbitrage,capital market equilibrium, and Pareto efficiency are studied undervarious market conditions. Among the main results area unique dichotomous pricing model,unifying and generalizing theexisting models, that can be used for pricing any financialsecurities under both complete andincomplete markets,conditions for individual optimality thathold for general utilities(including expected utility as a special case),the existence and uniqueness of capital marketequilibrium, andimplications of capital market equilibrium,including a separation theorem,inherent efficiency of the market portfolio, Pareto efficiency, andseveral testable hypotheses thatpredict securities' equilibrium up-market potentials and down-marketpotentials, respectively.
Subjects: 
Perception of reward and risk
Reward-risk utility
Inherent efficiency
Quasi-complete market
Dichotomous pricing model
Approximate arbitrage
Up-market and Down-market potentials
JEL: 
D46
D81
G10
G11
G12
Document Type: 
Working Paper

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