The significance of the market portfolio

Arguments for creating a market to allow trading the portfolioof all endowments in the entire world, the 'market portfolio',are considered. This world share market would represent a radicalinnovation, since at the present time only a small fractionof world endowments are traded. Using a stochastic endowmenteconomy where preference are mean variance, it is shown thatcreating such a market may be justified in terms of its contributionto social welfare. It is also argued that creating a marketfor world shares is attractive for certain reasons of robustnessand simplicity.     

Habit formation and the equity–premium puzzle: a skeptical view

We argue that, ceteris paribus, introducing a habit that resolves the equity–premium puzzle is equivalent to increasing the Arrow-Pratt coefficient of relative risk aversion, AP-RRA. If we constrain the AP-RRA to a constant ‘acceptable’ level, the effect on the equity premium is quantitatively insignificant. In a dynamic setting, the fluctuations of the habit increase the equity premium, slightly, though generates unrealistic fluctuations in the risk-free interest rate. We conclude a habit is observationally equivalent, up to a first-order approximation, to a higher AP-RRA and to a preference shock. These effects cannot resolve the equity–premium puzzle.