SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: We study a financial market containing an infinite number of assets, where each asset price is driven by an idiosyncratic random source as well as by a systematic noise term. Introducing 2 asymptotic assets" which correspond to certain infinitely well diversified portfolios we study absence of (asymptotic) arbiytrage, and in this context we obtain continuous time extensions of atemporal APT results. We also study completeness and derivative pricing, showing that the possibility of forming infinitely well diversified portfolios has the property of completing the market. It also turns out that models where the all risk is of diffusion type are qualitatively quite different from models where one risk is of diffusion type and the other is of Poisson type. We also present a simple martingale based theory for absence of asymptotic arbitrage.

Keywords: Large economies; diversifiable risk; APT; asymptotic arbitrage; completeness; martingales

JEL-codes: G12; G13

28 pages, September 1996

Full text files

hastef0122.pdf  Full text

Download statistics

Published as

Tomas Björk and Bertil Näslund, (1998), 'Diversified Portfolios in Continuous Time', European Finance Review, vol 1, no 3, pages 361-387

• Stockholm School of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:hastef:0122This page generated on 2024-09-13 22:15:04.