Capital Market Equilibrium and Parametric Optimization

  • Wolfgang Bühler


Most of the work which has been carried out in the field of portfolio theory, capital market theory under risk and theoretical work in finance based on the CAP- models, assumes that means and variances of the uncertain rates of return on the portfolios are known exactly. These informational assumptions have been generalized into two directions:

Firstly, informational asymmetries between different groups of investors and/ or their agents have been taken explicitly into account.1) Two basic cases of asymmetric information are considered. In the first case one group of investors (e.g. the shareholders) can not observe the actions taken by a second group (e.g. the management). This “hidden action” problem2) may result in decisions of the second group which are not in the interest of the first. Interestingly, this additional risk introduced by the unobservability of actions can not be resolved by the capital market if only simple debt and equity contracts are available. But this moral hazard problem can be solved by the introduction of new contracts (e.g. options) which, therefore, are explained positively by the fact of unobservable actions.3) In the second case of informational asymmetry one group of investors (e.g. old shareholders) has better information about the quality of the firm than the second (e.g. new shareholders). This “hidden information” problem4) may result in an phenomenon called “adverse selection”.5) Both types of asymmetric information lead to a better understanding of the financial behavior of firms and help to explain the wide variety of existing financial instruments and institutions.


Optimal Portfolio Portfolio Selection Efficient Frontier Informational Asymmetry Riskless Asset 
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© Springer-Verlag Berlin Heidelberg 1991

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  • Wolfgang Bühler

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