Please use this identifier to cite or link to this item: https://doi.org/10.1016/S0022-0531(03)00038-3
Title: Exact arbitrage, well-diversified portfolios and asset pricing in large markets
Authors: Khan, M.A.
Sun, Y. 
Keywords: Arbitrage pricing theory
Asymptotic arbitrage
Essential risk
Exact arbitrage
Exact law of numbers
Loeb measure space
Well-diversified portfolio
Issue Date: 1-Jun-2003
Citation: Khan, M.A., Sun, Y. (2003-06-01). Exact arbitrage, well-diversified portfolios and asset pricing in large markets. Journal of Economic Theory 110 (2) : 337-373. ScholarBank@NUS Repository. https://doi.org/10.1016/S0022-0531(03)00038-3
Abstract: For a market with an atomless continuum of assets, we formulate the intuitive idea of a "well-diversified" portfolio, and present a notion of "exact arbitrage", strictly weaker than the more conventional notion of "asymptotic arbitrage", and necessary and sufficient for the validity of an APT pricing formula. Our formula involves "essential" risk, one based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets. © 2003 Elsevier Science (USA). All rights reserved.
Source Title: Journal of Economic Theory
URI: http://scholarbank.nus.edu.sg/handle/10635/103218
ISSN: 00220531
DOI: 10.1016/S0022-0531(03)00038-3
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