A Concave Security Market Line

Item Type Monograph (Working Paper)
Abstract We provide theoretical and empirical arguments in favor of a concave shape for the security market line, or a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, different investors generally hold different sets of risky securities. Despite the differences in composition, the optimal portfolios generally share a joint exposure to systematic risk. Equilibrium in this case can be approximated by a concave relation between expected return and market beta rather than the traditional linear relation. An empirical analysis of U.S. stock market data confirms the existence of a significant and robust, concave cross-sectional relation between average return and estimated past market beta. We estimate that the market-risk premium is at least five to six percent per annum for the average stock, substantially higher than conventional estimates.
Authors De Giorgi, Enrico; Post, Thierry & Yalcin, Atakan
Projects De Giorgi, Enrico & Audrino, Francesco (2010) Applying Recent Developments in Computational Statistics to Behavioral Asset Pricing and Portfolio Selection [applied research project]
Language English
Keywords capital market equilibrium, asset pricing, investment restrictions, portfolio theory
Subjects economics
HSG Classification contribution to scientific community
Refereed No
Date 2012
Publisher http://ssrn.com/abstract=1800229
Depositing User Prof. Ph.D Enrico Giovanni De Giorgi
Date Deposited 24 Jan 2012 20:16
Last Modified 29 Jun 2022 00:22
URI: https://www.alexandria.unisg.ch/publications/209125

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De Giorgi, Enrico; Post, Thierry & Yalcin, Atakan: A Concave Security Market Line. , 2012,

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https://www.alexandria.unisg.ch/id/eprint/209125
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