On the Optimal Investment

19 Pages Posted: 14 Jun 2016

See all articles by José Manuel Corcuera

José Manuel Corcuera

University of Barcelona

José Fajardo

Getulio Vargas Foundation

Olivier Menouken Pamen

University of Liverpool

Date Written: June 8, 2016

Abstract

In 1988 Dybvig introduced the payoff distribution pricing model (PDPM) as an alternative to the capital asset pricing model (CAPM). Under this new paradigm agents preferences depend on the probability distribution of the payoff and for the same distribution agents prefer the payoff that requires less investment. In this context he gave the notion of efficient payoff. Both approaches run parallel to the theory of choice of von Neumann-Morgenstern (1947), known as the Expected Utility Theory and posterior axiomatic alternatives. In this paper we consider the notion of optimal payoff as that maximizing the terminal position for a chosen preference functional and we investigate the relationship between both concepts, optimal and efficient payoffs, as well as the behavior of the efficient payoffs under different market dynamics. We also show that path-dependent options can be efficient in some simple models.

Keywords: Expected Utility, Prospect Theory, Risk Aversion, Law invariant preferences, Growth Optimal Portfolio, Portfolio Numeraire

JEL Classification: G11, D03, D11, G02

Suggested Citation

Corcuera, José Manuel and Fajardo, José and Menouken Pamen, Olivier, On the Optimal Investment (June 8, 2016). Available at SSRN: https://ssrn.com/abstract=2793938 or http://dx.doi.org/10.2139/ssrn.2793938

José Manuel Corcuera (Contact Author)

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

José Fajardo

Getulio Vargas Foundation ( email )

Brazil
55213799 5781 (Phone)

HOME PAGE: http://www.josefajardo.com

Olivier Menouken Pamen

University of Liverpool ( email )

Liverpool
United Kingdom

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