In which financial markets do mutual fund theorems hold true? (Q2271725)

The authors obtain necessary and sufficient conditions (on a financial model) for the mutual fund theorem to hold true. The paper is based on martingale representations. The martingale measure is identified, for which all random variables, measurable with respect to its density, can be replicated by trading (if such measure exists) as being the dual minimizer, corresponding to logarithmic utility, so its density is the inverse of the terminal value of the numéraire portfolio process. The main positive result states that if every bounded path-independent option on the numéraire portfolio which expires at the final time horizon \(T\) can be replicated by trading only in the numéraire portfolio and the risk-free asset, then the mutual fund theorem holds true with respect to arbitrary utility functions.