Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the equilibrium theory of asset prices. The basic assumption is to summarize any probability distribution into its moments, so that preferences over distributions can be mapped into preferences over vectors of moments. This implies that assets, like Lancaster’s (1966) consumption goods, are bundles of characteristics, and can be directly priced, at the margin, in terms of the market portfolio. Expected utility is not required and St.Petersburg’s, Allais’s and other paradoxes may easily be solved.
A suggestion for simplifying the theory of asset prices / R. Cesari; C. D'Adda. - STAMPA. - (2008), pp. 210-228.
A suggestion for simplifying the theory of asset prices
CESARI, RICCARDO;D'ADDA, CARLO
2008
Abstract
Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the equilibrium theory of asset prices. The basic assumption is to summarize any probability distribution into its moments, so that preferences over distributions can be mapped into preferences over vectors of moments. This implies that assets, like Lancaster’s (1966) consumption goods, are bundles of characteristics, and can be directly priced, at the margin, in terms of the market portfolio. Expected utility is not required and St.Petersburg’s, Allais’s and other paradoxes may easily be solved.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
