Mean Variance Efficiency of the Market Portfolio and Futures Trading

Posted: 6 Sep 2000

See all articles by Abraham Lioui

Abraham Lioui

EDHEC Business School

Patrice Poncet

ESSEC Business School; Universite Paris I Pantheon Sorbonne

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

Lioui, Abraham and Poncet, Patrice, Mean Variance Efficiency of the Market Portfolio and Futures Trading. Journal of Futures Markets, Available at SSRN: https://ssrn.com/abstract=238774

Abraham Lioui

EDHEC Business School ( email )

France

Patrice Poncet (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
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Universite Paris I Pantheon Sorbonne ( email )

Finance Department, UFR 06
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75005 Paris
France
33 1 40 46 2783 (Phone)
33 1 40 46 33 66 (Fax)

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