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A suggestion for simplifying the theory of asset prices

By Riccardo Cesari

Abstract

Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the 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 both St.Petersburg and Allais paradoxes may be easily solved. JEL classification: G12, G1

Topics: asset pricing, utility, CAPM, St. Petersburg paradox, Allais paradox Paper presented to “John Hicks, One Hundredth Anniversary Workshop”, Bologna
Year: 2013
OAI identifier: oai:CiteSeerX.psu:10.1.1.320.6988
Provided by: CiteSeerX
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