Mean Variance Efficiency of the Market Portfolio and Futures Trading
Posted: 6 Sep 2000
Abstract
When an incomplete financial market of cash assets is completed (partially or not) by the introduction of non-redundant futures contracts, mean-variance efficiency of the market portfolio is not required. This result holds regardless of whether individuals exhibit myopic behaviors or not. The investors' optimal 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. In our pure exchange economy, a (3+K) mutual fund separation is obtained at equilibrium, with K the number of economic state variables, in lieu of the usual (2+K) fund separation. The linear relation between assets' expected returns and betas still holds at equilibrium without mean variance efficiency of the market portfolio (of primitive cash assets).
Note: This is a description of the paper and not the actual abstract.
JEL Classification: G12
Suggested Citation: Suggested Citation