Capital Market Equilibrium with Heterogeneous Investors
27 Pages Posted: 3 May 2006
Date Written: March 19, 2006
Abstract
As a two-parameter model that satisfies stochastic dominance, the mean-extended Gini model is used to build efficient portfolios. The model also quantifies risk aversion heterogeneity in capital markets. Using a simple Edgeworth box framework, we show how capital market equilibrium is achieved for risky assets. This approach provides a richer basis for analysis of the pricing of risky assets under heterogeneous preferences. Our main results are: (1) At equilibrium all homogeneous mean-variance investors and mean-extended Gini investors will hold portfolios of risky assets that are identical to the market portfolio; and (2) heterogeneous investors as expressed by the variance or the extended Gini hold different risky assets in portfolios, and no one must hold the market portfolio.
Keywords: CAPM, Gini
JEL Classification: G11, G12
Suggested Citation: Suggested Citation