Nash Competive Equilibria and Two Period Fund Separation

We suggest a simple asset market model in which we analyze competitive and strategic behavior simultaneously. If two-fund separation is found to hold across periods for competitive behavior, it also holds for strategic behavior. In this case the relative prices of the assets do not depend on whether the agents behave strategically or competitively. The agents acting strategically will however invest less in the common mutual fund. Constant relative risk aversion and theabsence of aggregate risk are shown to be two alternative suffcient conditions for two-period fund separation. By including derivatives in our model, further strategic aspects arise. In this case the strategic behavior is found to differ from the competitive behavior even for utility functions leading to two-fund separation.