On the optimal investment

Fajardo, José and Corcuera, José Manuel and Menouken Pamen, Olivier (2016): On the optimal investment.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Expected Utility, Prospect Theory, Risk Aversion, Law invariant preferences, Growth Optimal Portfolio, Portfolio Numeraire.
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; G - Financial Economics > G0 - General > G02 - Behavioral Finance: Underlying Principles; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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