Article1973

Risk Aversion and the Martingale Property of Stock Prices

354 citations0/0 files storedInternational Economic Review

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Financial Markets and Investment Strategies Stochastic processes and financial applications Economic theories and models

Abstract

gale property has received theoretical support from recent work by Samuelson [10].2 However, Samuelson's result depends on the assumption that investors require an exogenously given expected rate of return. It is natural to inquire whether the martingale property can be derived when the assumption of a given expected rate of return is relaxed. That question will be discussed in this paper. It is no longer assumed that the expected rate of return may be taken as given. thien it becomes necessary to consider how the expected rate of return is determined, and this involves analyzing the relation between the riskiness of stock and the risk-aversion of investors. We are led to consider models of portfolio selection of the type developed by Tobin [13], [14] and Markowitz [6], and the associated models of capital market equilibrium of Sharpe [12] and Lintner [5], since these deal explicitly with this question. However, it is apparent that models of the Sharpe-Lintner type, though they do relate the expected rate of return to the optimizing behavior of risk-averse investors, can cast no light on the martingale question. This is so because these models assume a one-period framework, with the expected value and variance of the next-period price being taken as given, and therefore cannot generate an intertemporal probability distribution. It is necessary somehow to dynamize the Sharpe-Lintner model; i.e., to modify the model so that it generates an intertemporal distribution of asset prices. In order to do this it is assumed that investors bid for a financial asset (stock) which constitutes a claim to a random intertemporal stream of earnings with known probability distribution, rather than for a security which matures in the next period as in the Sharpe-Lintner one-period portfolio models. It is assumed that investors have a choice between risky stock and a riskless asset earning a constant exogenous rate of return, as in the one-period portfolio models. In Section 2 such a model is developed, though only for a restricted class of

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 354 citations exist upstream.

References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1959Portfolio Selection: Efficient Diversification of Investments 1969Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case 1976Risk Aversion in the Small and in the Large 1958Liquidity Preference as Behavior Towards Risk 1968Optimal Multiperiod Portfolio Policies

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.