TY - JOUR
T1 - Portfolio selection with monotone mean-variance preferences
AU - MacCheroni, Fabio
AU - Marinacci, Massimo
AU - Rustichini, Aldo
AU - Taboga, Marco
PY - 2009/7
Y1 - 2009/7
N2 - We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated with this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the capital asset pricing model (CAPM), which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.
AB - We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated with this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the capital asset pricing model (CAPM), which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.
KW - Capital asset pricing model
KW - Monotone approximation
KW - Monotone mean-variance
KW - Portfolio selection
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U2 - 10.1111/j.1467-9965.2009.00376.x
DO - 10.1111/j.1467-9965.2009.00376.x
M3 - Article
AN - SCOPUS:67650784378
VL - 19
SP - 487
EP - 521
JO - Mathematical Finance
JF - Mathematical Finance
SN - 0960-1627
IS - 3
ER -