A binomial model approach to modelling portfolio volatility in continuous time

Dempsey, M 2005, 'A binomial model approach to modelling portfolio volatility in continuous time', in V. Kachitvichyanukul, U. Purintrapiban, P. Utayopas (ed.) Proceedings of the 2005 International Conference on Simulation and Modelling (SimMod), Bangkok, Thailand, January 17-19 2005, pp. 609-617.


Document type: Conference Paper
Collection: Conference Papers

Title A binomial model approach to modelling portfolio volatility in continuous time
Author(s) Dempsey, M
Year 2005
Conference name Integrating Sciences and Technology for Effective Resource Management
Conference location Bangkok, Thailand
Conference dates January 17-19 2005
Proceedings title Proceedings of the 2005 International Conference on Simulation and Modelling (SimMod)
Editor(s) V. Kachitvichyanukul, U. Purintrapiban, P. Utayopas
Publisher Asian Institute of Technology
Place of publication Bangkok, Thailand
Start page 609
End page 617
Total pages 9
Abstract The present article offers a binomial model replication of Merton's (1969, 1973) model of portfolio selection allowing volatility in continuous time. Interestingly, the investor risk premium is modelled as a consequence of the mathematics of risk itself (rather than that of investors setting prices at the start of each investment period). The model reveals the inherent circularity of the CAPM as an explanation of investor volatility-return preferences. In the model, the outcome return on a risky asset is identified as having an idiosyncratic risk component. The model thereby challenges the traditional interpretation of Markowitz portfolio theory, namely that idiosyncratic risk variations cancel.
Copyright notice © 2005 Asian Institute of Technology
ISBN 9748202575
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