Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-05T11:02:09.905Z Has data issue: false hasContentIssue false

Mean-Variance Utility Functions and the Demand for Risky Assets: An Empirical Analysis Using Flexible Functional Forms

Published online by Cambridge University Press:  01 December 2009

Extract

In a recent study, Levy and Markowitz [15] demonstrate that, at least for some utility functions, expected utility can be approximated by a judiciously chosen function defined over mean and variance. In addition to resurrecting mean-variance analysis from the limbo into which it was placed by the criticisms of Borch [10] and others, the analysis by Levy and Markowitz yields a more direct approach to portfolio analysis than that provided by the current empirical literature. The current portfolio literature is concerned with notions of efficient sets and systematic risk rather than with utility functions and mean-variance. While much has been gained from a utility-free methodology, it is ultimately predicated upon a separation theorem and, hence, an environment with zero transactions costs. But security markets are not costless and the separation theorem may not hold. In that event, a utility-dependent approach to portfolio analysis could potentially lead to more powerful results especially if such an approach could be empirically implemented.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1983

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Aivazian, V. A.On the Comparative-Statics of Asset Demand.” Working Paper Series No. 124, McMaster University (1976).Google Scholar
[2]Allingham, M., and Morishima, M.. “Veblen Effects and Portfolio Selection.” In Theory of Demand: Real and Monetary, Morishima, M. et al. , editors. Oxford: Clarendon Press (1973).Google Scholar
[3]Applebaum, E.On the Choice of Functional Forms.” International Economic Review, Vol. 21 (June 1979), pp. 449458.Google Scholar
[4]Barrett, R. J.; Gray, M. R.; and Parkin, J. M.. “The Demand for Financial Assets by the Personal Sector of the U.K. Economy.” In Modelling the Economy, Renton, G.A., ed., London: Heinemann Educational Books (1975).Google Scholar
[5]Barten, A. P.Maximum Likelihood Estimation of a Complete System of Demand Equations.” European Economic Review, Vol. 11 (Fall 1969), pp. 773.CrossRefGoogle Scholar
[6]Berndt, E. R.; Hall, B. H.; Hall, R. E.; and Hausman, J. A.. “Estimation and Inference in Nonlinear Structural Models.” Annals of Economic and Social Measurement, (October 1974); pp. 653665.Google Scholar
[7]Berndt, E. R., and Khaled, M. S.. “Parametric Productivity Measurement and Choice among Flexible Functional Forms.” Journal of Political Economy, Vol. 87 (December 1979), pp. 12201245.CrossRefGoogle Scholar
[8]Berndt, E. R.; Darrough, M. N.; and Diewert, W. E.. “Flexible Functional Forms and Expenditure Distribution: An Application to Canadian Consumer Demand Functions.” International Economic Review, Vol. 18 (October 1977), pp. 651675.CrossRefGoogle Scholar
[9]Bhattacharyya, D. K.Demand for Financial Assets: An Econometric Study of the U.K. Personal Sector. Westmead, England: Saxon House (1978).Google Scholar
[10]Borch, K.A Note on Uncertainty and Indifference Curves.” Review of Economic Studies, Vol. 36 (January 1969), pp. 14.CrossRefGoogle Scholar
[11]Christiensen, L. R.; Jorgenson, D. W.; and Lau, L.J.. “Transcendental Logarithmic Utility Functions.“ American Economic Review, Vol. 65 (June 1975), pp. 367383.Google Scholar
[12]Christiensen, L. R., and Manser, M.. “The Translog Utility Function and the Substitution of Meats in U. S. Consumption.” Journal of Econometrics, Vol. 5 (January 1977), pp. 3753.Google Scholar
[13]Donovan, D. J.Modeling the Demand for Liquid Assets: An Application to Canada.” International Monetary Fund Staff Papers (December 1978), pp. 676704.CrossRefGoogle Scholar
[14]Khaled, M.Choice among Functional Forms: A Parametric Approach Based on the Generalized Box-Cox Functional Form.” Discussion Paper, University of British Columbia (1977).Google Scholar
[15]Levy, H., and Markowitz, H. M.. “Approximating Expected Utility by a Function of Mean and Variance.” American Economic Review, Vol. 69 (June 1979), pp. 308317Google Scholar
[16]Woodland, A. D.Stochastic Specification and the Estimation of Share Equations.” Journal of Econometrics, Vol. 10 (July 1979), pp. 361383.CrossRefGoogle Scholar