Summary
In this paper we derived a system of asset demand functions from an expected utility maximization model, in which the utility function satisfies both the decreasing absolute risk aversion as well as the increasing relative risk aversion criteria. The rates of return are assumed to be distributed as a multivariate log-normal distribution. It is shown that a system of log-linear asset demand functions follows from the exact model as an approximation and performs better than similar types of linear asset demand functions which follow from a negative exponential utility function.
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I am grateful to Professor A. R. Bergstrom and Mr. R. E. Bailey for their comments on an earlier draft. Comments from the referee of this journal helped me to improve my presentation. I am also grateful to Professor R. Bandyopadhyay for his comments. I am solely responsible for any errors.
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Bhattacharyya, D.K. An economic rationale for a system of loglinear asset demand functions. De Economist 128, 205–225 (1980). https://doi.org/10.1007/BF01717801
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DOI: https://doi.org/10.1007/BF01717801