Some Challenges in Portfolio Theory and Asset Pricing

The foundations of modern finance are Markowitz’ theory of portfolio selection, the Capital Asset Pricing Model (CAPM) of Sharpe, Lintner and Mossin, the option pricing formula due to Black, Scholes and Merton and, perhaps to a lesser extent, Ross’ Arbitrage Pricing Theory (APT). In their traditional form, these foundations depend to a considerable extent on the assumption that the returns on risky financial assets follow a multivariate normal distribution or, in some cases, a multivariate elliptically symmetric distribution. Some of the foundations continue to hold, with suitable extensions, if instead returns follow some skew-symmetric symmetric distributions. This presentation covers some of the challenges that face those who would seek to extend portfolio theory and asset pricing under other non-normal multivariate distributions. The talk, which presents the author’s experiences based both on his research and professional experience, covers statistical issues and those which are more specific to finance.Non UBCUnreviewedAuthor affiliation: Sheffield University Management SchoolResearche