Capital Market Equilibrium with Heterogeneous Investors

27 Pages Posted: 3 May 2006

See all articles by Haim Shalit

Haim Shalit

Ben-Gurion University of the Negev - Department of Economics

Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics; National Bureau of Economic Research (NBER)

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

Shalit, Haim and Yitzhaki, Shlomo, Capital Market Equilibrium with Heterogeneous Investors (March 19, 2006). Available at SSRN: https://ssrn.com/abstract=899276 or http://dx.doi.org/10.2139/ssrn.899276

Haim Shalit (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Department of Economics
Beer-Sheva 84105
Israel
+972-8-6472299 (Phone)
+972-8-6472941 (Fax)

Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 659 2201 (Phone)
+972 2 652 2319 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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