a computational scheme for the optimal strategy in an incomplete market abstract we examine the optimal portfolio selection problem of a single agent who receives an unhedgeable endowment the agent wishes to optimize his her log utility derived from his her terminal wealth we do not solve this problem analytically but construct a recursive computational algorithm which approximates the optimal one we present an intelligent initial portfolio which requires numerically about 25 fewer corrective steps in the algorithm than a random initial portfolio and outperforms the portfolio which ignores the unhedgeable risk of the endowment

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

the dynamics of company profits an international comparison 1 profits and the process of competition dennis c mueller 2 modelling persistent profitability paul a geroski 3 the persistence of profits in the united states dennis c mueller 4 the persistence of profits in us manufacturing industries ioannis kessides 5 the persistence of profitability in canada r shyam khemani and d m shapiro 6 persistence of corporate profits in the federal republic of germany joachim schwalbach and talat mahmood 7 the persistence of profits in france frederic jenny and andre paul weber 8 the persistence of profits in japan hiroyuki odagiri and hideki yamawaki 9 the persistence of profits in the uk john cubbin and paul a geroski 10 the persistence of profits international comparison hiroyuki odagiri and hideki yamawaki 11 the persistence of profits in perspective paul a geroski and dennis c mueller

exploiting ergodicity in forecasts of corporate profitability abstract theory suggests that competition tends to equalize profit rates through the process of capital reallocation and numerous studies have confirmed that profit rates are indeed persistent and mean reverting recent empirical evidence further shows that fluctuations in the profitability of surviving corporations are well approximated by a stationary laplace distribution here we show that a parsimonious diffusion process of corporate profitability that accounts for all three features of the data achieves better out of sample forecasting performance across different time horizons than previously suggested time series and cross sectional models as a consequence of replicating the empirical distribution of profit rates the model prescribes a particular strength or speed for the mean reversion of all returns which leads to superior forecasts of individual time series when we exploit information from the cross sectional collection of firms the new model should appeal to managers analysts investors and other groups of corporate stakeholders who are interested in accurate forecasts of profitability to the extent that mean reversion in profitability is the source of predictable variation in earnings our approach can also be used in forecasts of earnings and is thus useful for firm valuation

a statistical equilibrium model of competitive firms abstract we find that the empirical density of firm profit rates measured as returns on assets is markedly non gaussian and reasonably well described by an exponential power or subbotin distribution we start from a statistical equilibrium model that leads to a stationary subbotin density in the presence of complex interactions among competitive heterogeneous firms to investigate the dynamics of firm profitability we construct a diffusion process that has the subbotin distribution as its stationary probability density this leads to a phenomenologically inspired interpretation of variations in the shape parameter of the subbotin distribution which essentially measures the competitive pressure in and across industries our findings have profound implications both for the previous literature on the persistence of profits as well as for understanding competition as a dynamic process our main formal finding is that firms idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin and that a ratio of these two effects ultimately determines the dispersion of the equilibrium distribution

why does junior put all his eggs in one basket a potential rational explanation for holding concentrated portfolios abstract empirical studies of household portfolios show that young households with little financial wealth hold underdiversified portfolios that are concentrated in a small number of assets a fact often attributed to behavioral biases we present a potential rational alternative we show that investors with little financial wealth who receive labor income rationally limit the number of assets they invest in when faced with financial constraints such as margin requirements and restrictions on borrowing we provide theoretical and numerical support for our results and identify the ratio of financial wealth to labor income as a useful control variable for household portfolio studies

on the relationship between firm size and export intensity export marketing literature supports the view that firm size is positively related to export intensity although the empirical findings have been mixed a number of theoretical arguments are used to support this proposition i e international marketing economies of scale limited managerial and financial resources of small firms decisionmaker s risk perception based on a large survey of the italian manufacturing industry the article falsifies the proposition and challenges some widely held assumptions in export marketing literature

how firms should hedge substantial academic research explains why firms should hedge but little work has addressed how firms should hedge we assume that firms can experience costly states of nature and derive optimal hedging strategies using vanilla derivatives e g forwards and options and custom exotic derivative contracts for a value maximizing firm facing both hedgable price and unhedgable quantity risks customized exotic derivatives are typically better than vanilla contracts when correlations between prices and quantities are large in magnitude and when quantity risks are substantially greater than price risks finally we discuss how our model may be applied in practice copyright 2002 oxford university press

corporate growth and industrial structures some evidence from the italian manufacturing industry this work analyses the properties of corporate growth in a large longitudinal sample of italian manufacturing firms in particular it focuses on the statistical properties of growth rates and on the influence of proxies for relative efficiency upon relative growth in line with previous work the emergence of fat tails in growth rate distributions and the idiosyncratic nature of autocorrelation coefficients confirm the existence of a structure in the growth process richer than the one normally assumed by the gibrat law hypothesis and suggest the presence of firm specific drivers of growth at the same time there is a remarkable puzzle concerning the absence of any negative relationship between size and growth variance and only weak influences of relative efficiencies upon growth dynamics

real options with constant relative risk aversion real options problems have recently attracted much attention worldwide one such problem is how to deal with claims on non traded assets often there is another traded asset which is correlated to the non traded asset and this traded asset is used as a proxy for hedging purposes we introduce a second non traded log brownian asset into the well known merton investment model with power law utility the investor has a claim on units of the non traded asset and the question is how to price and hedge this random payoff the presence of the second brownian motion means that we are in the situation of incomplete markets we propose an approximation to the solution for the optimal reservation price and hedge which is accurate when the position is small in comparison to wealth the resulting loss when a suboptimal proxy strategy is followed is shown to be approximately quadratic in 1

optimal consumption and investment strategies with a perishable and an indivisible durable consumption good abstract we study the consumption and investment choice of an agent in a continuous time economy with a riskless asset several risky financial assets and two consumption goods namely a perishable and a durable good with an uncertain price evolution assuming lognormal prices and a multiplicatively separable isoelastic utility function we provide an explicit merton type solution for the optimal strategies for the case where the durable and all other assets can be traded without transaction costs for the case where the durable good is indivisible in the sense that durable trades imply transaction costs proportional to the value of the current durable holdings we show analytically that the optimal durable trading policy is characterized by three constants z z as long as the ratio z of the total current wealth to the value of current durable holdings of the investor is in z z it is optimal not to trade the durable at the boundaries of this interval it is optimal to trade the durable to attain z z the model is used to examine the optimal substitution between perishable and durable consumption and the importance of the durable price uncertainty and the correlation between the price of the durable good and financial asset prices

the persistence of profit differentials in indian industry the competitive process in a market economy is expected to work to eliminate profit differentials between firms industries in the long run in the indian case we note that quite a large number of industries experience above average profits that persist over time our analysis show that such persistence is higher in fast growing industries with high strategic barriers on the other hand government controls seem to be very effective in discouraging such persistence

does classical competition explain the statistical features of firm growth abstract we propose a statistical equilibrium model where the tendency for competition to equalize profit rates results in an exponential power or subbotin distribution the model supports and extends recent evidence on the laplace distribution of firm growth rates

the relationship between firm growth size and age estimates for 100 manufacturing industries this study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics it finds that firm growth the variability of firm growth and the probability that a firm will fail decrease with firm age it also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow growing firms from the sample gibrat s law therefore fails although the severity of the failure decreases with firm size copyright 1987 by blackwell publishing ltd

stochastic lifestyling optimal dynamic asset allocation for defined contribution pension plans this paper considers the asset allocation strategies open to members of deflnedcontribution pension plans we investigate a model that incorporates three sources of risk asset risk and salary or labour income risk in the accumulation phase and interest rate risk at the point of retirement we propose a new form of terminal utility function incorporating habit formation that uses the plan member s flnal salary as a numeraire the paper discusses various properties and characteristics of the optimal stochastic asset allocation strategy which we call stochastic lifestyling both with and without the presence of non hedgeable salary risk we compare the performance of stochastic lifestlying with some popular strategies used by pension providers including deterministic lifestyling which involves a gradual switch from equities to bonds according to preset rules and static strategies that invest in benchmark mixed funds we flnd that the use of stochastic lifestyling signiflcantly enhances the welfare of a wide range of potential plan members relative to these other strategies jel classiflcation e21 g11 g23

the role of labor income risk in household risk taking abstract in fifteen european countries china and the us stocks and business equity as a share of total household assets are represented by an increasing and convex function of income wealth a parsimonious model fitted to the data shows why background labor income risk can explain much of this risk taking pattern uncontrollable labor income risk stresses middle income households more because labor income is a larger fraction of their total lifetime resources compared with the rich in response middle income households reduce controllable financial risk richer households having less pressure can afford more risk taking the poor take low risk because they avoid jeopardizing their subsistence consumption

the persistence of profit a new empirical interpretation abstract inferences are drawn about the true coefficients which correspond to sample estimates of a persistence of profit model fitted over a large number of firms this is done by generating simulated sampling distributions for the estimators over various distributional assumptions profits seem to be stationary for all firms with an average short run persistence coefficient of 0 59 higher than most previous estimates long run profit rates differ between firms although by less than is suggested by direct observation of variations in mean profit rates calculated over time short run persistence appears to be inversely related to unsystematic variation in profit

implications of quantal response statistical equilibrium abstract this paper explores the foundations and properties of the quantal response statistical equilibrium qrse model developed by scharfenaker and foley 2017 the qrse model provides a behavioral foundation for the formation of aggregate economic outcomes in social systems characterized by negative feedbacks it can approximate a wide range of commonly encountered theoretical distributions that have been identified as economic statistical equilibrium and displays qualitatively similar behavior to the subbotin and asymmetric subbotin distributions that range from the laplace to the normal distribution in the limit asymmetry in the frequency distributions of economic outcomes can be understood as arising from the unfulfilled expectations of entropy constrained decision makers this paper demonstrates the logic of the qrse model in an application to us stock market data dating back to 1926 the model provides a parsimonious explanation for the distribution of rates of return on private equities as well as a behavioral foundation for asset price fluctuations

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

retirement saving with contribution payments and labor income as a benchmark for investments abstract in this paper we study the retirement saving problem from the point of view of a plan sponsor who makes contribution payments for the future retirement of an employee the plan sponsor considers the employee s labor income as investment benchmark in order to ensure the continuation of consumption habits after retirement we demonstrate that the demand for risky assets increases at low wealth levels due to the contribution payments we quantify the demand for hedging against changes in wage growth and find that it is relatively small we show that downside risk measures increase risk taking at both low and high levels of wealth

the persistence of profits a european comparison this paper is concerned with modeling the movements in profits of firms over time at the heart of the emp irical model is a latent variables problem which arises from the fact that entry and imitation do not actually have to occur to have an ef fect on profits a solution to this problem is explored and then emp irical results are presented comparing a sample of firms from the uni ted kingdom france and west germany copyright 1988 by royal economic society

on the fluctuations in consumption and market returns in the presence of labor and human capital an equilibrium analysis abstract we examine the effects of human capital on consumption stock market and other fluctuations in a general equilibrium continuous time model a representative consumer worker investor derives utility from consumption and leisure a representative firm demands labor as the sole input to a stochastic production technology driven by general possibly nonmultiplicative shocks for cobb douglas utility and multiplicative shocks labor is nonstochastic and consumption and stock market volatility are equated as under no human capital deviations from this are analyzed for logarithmic utility and constant elasticity of substitution production technology cases are identified where the presence of labor causes consumption to be smoother than the stock market

a unified model of entrepreneurship dynamics we develop an incomplete markets q theoretic model to study entrepreneurship dynamics precautionary motive borrowing constraints and capital illiquidity lead to underinvestment conservative debt use under consumption and less risky portfolio allocation the endogenous liquid wealth illiquid capital ratio w measures time varying financial constraint the option to accumulate wealth before entry is critical for entrepreneurship flexible exit option is important for risk management purposes investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely contrary to predictions of standard financial constraint models we show that the idiosyncratic risk premium is quantitatively significant especially for low w

are output growth rate distributions fat tailed some evidence from oecd countries this work explores some distributional properties of aggregate output growth rate time series we show that in the majority of oecd countries output growth rate distributions are well approximated by symmetric exponential power densities with tails much fatter than those of a gaussian fat tails robustly emerge in output growth rates independently of i the way we measure aggregate output ii the family of densities employed in the estimation iii the length of time lags used to compute growth rates we also show that fat tails still characterize output growth rate distributions even after one washes away outliers autocorrelation and heteroscedasticity

why are distributions of firm growth rates tent shaped abstract recent empirical analyses on different datasets have revealed a common exponential behavior in the shape of the probability density of the corporate growth rates we present new evidence on this topic from the italian manufacturing industry and propose a very simple mechanism that under rather general assumptions provides a robust explanation for the observed regularities

a new approach to business fluctuations heterogeneous interacting agents scaling laws and financial fragility abstract in this paper we discuss a scaling approach to business fluctuations our starting point consists in recognizing that concepts and methods derived from physics have allowed economists to re discover a set of stylized facts which have to be satisfactorily accounted for in their models standard macroeconomics based on a reductionist approach centered on the representative agent is definitely badly equipped for this task on the contrary we show that a simple financial fragility agent based model based on complex interactions of heterogeneous agents is able to replicate a large number of scaling type stylized facts with a remarkable high degree of statistical precision

zipf s law and maximum sustainable growth abstract zipf s law states that the number of firms with size greater than s is inversely proportional to s most explanations start with gibrat s rule of proportional growth but require additional constraints we show that gibrat s rule at all firm levels yields zipf s law under a balance condition between the effective growth rate of incumbent firms which includes their possible demise and the growth rate of investments in entrant firms under the additional assumption that firms do not consume more resources than available we show that zipf s law is the signature that firms grow at the maximum reachable long term rate

an equilibrium model of asset pricing and moral hazard this article develops an integrated model of asset pricing and moral hazard it is demonstrated that the expected dollar return of a stock is independent of managerial incentives and idiosyncratic risk but the equilibrium price of the stock depends on them thus the expected rate of return is affected by managerial incentives and idiosyncratic risk it is shown however that managerial incentives and idiosyncratic risk affect the expected rate of return through their influence on systematic risk rather than serve as independent risk factors it is also shown that the risk aversion of the principal in the model leads to less emphasis on relative performance evaluation than

explaining the distribution of firm growth rates empirical analyses on aggregated datasets have revealed a common exponential behavior in the shape of the probability density of corporate growth rates we present clear cut evidence on this topic using disaggregated data we explain the observed regularities proposing a model in which firms ability to take up new business opportunities increases with the number of opportunities already exploited a theoretical result is presented for the limiting case in which the number of firms and opportunities go to infinity moreover using simulations we show that even in a small industry the agreement with asymptotic results is almost complete

do firms share the same functional form of their growth rate distribution a statistical test abstract we propose a hypothesis testing procedure to investigate whether the same growth rate distribution is shared by all the firms in a balanced panel or more generally whether they share the same functional form for this distribution without necessarily sharing the same parameters we apply the test to panels of us and european union publicly quoted manufacturing firms both at the sectoral and at the subsectoral naics level we consider the following null hypotheses about the growth rate distribution of the individual firms i an unknown shape common to all firms with all the firms sharing also the same parameters or with the firm variance related to its firm size through a scaling relationship and ii several functional shapes described by the subbotin family of distributions our empirical results indicate that firms do not have a common shape of the growth rate distribution at the sectorial naics level whereas firms may typically be described by the same shape of the distribution at the subsectorial level even if the specific shape may not be the same for different subsectors

where marx was right towards a more secure foundation for heterodox economics marx has never been very influential among western economists but the collapse of all types of socialist movements has reinforced the belief that marx is irrelevant for economic analysis at the same time some heterodox economists have claimed that neoclassical theory is sufficiently flexible to provide a foundation for post keynesians institutionalists evolutionary and feminist economists we argue that both conclusions are incorrect and that marx s treatment of agents choices and constraints and of systemic cooperation and conflict is far superior to that of orthodoxy in several crucial respects and can provide a better grounding for non neoclassical analyses

persistence of profitability and competition in emerging markets abstract this paper reports on time series analyses of the persistence of profitability of firms in emerging markets its central result is that there is less persistence in developing than in advanced economies the implications for the intensity of competition in emerging markets are examined

saving and investing for early retirement a theoretical analysis we study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time we show that investing for early retirement tends to increase savings and reduce an agent s effective relative risk aversion thus increasing her stock market exposure contrary to common intuition an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets even when her income and the investment opportunity set are constant the model predicts a decrease in risk aversion following strong market gains like those observed in the nineties

time preference and real investment abstract this paper studies the investment timing problem of an entrepreneur with a non tradable real option with undiversifiable risk we find that the time preference can have a significant impact on the risk attitude toward the idiosyncratic risk which results from the wealth effect on the implied option value if the agent is impatient patient an increase in idiosyncratic volatility increases decreases the agent s value and delays hastens investment this finding suggests several important implications and empirical predictions for investment decisions in private firms and public firms with concentrated ownership

optimal consumption and investment under time varying liquidity constraints we study consumption and investment decisions given realistic time varying constraints on borrowing we first consider the case where borrowing is constrained by a maximum debt to income ratio we then consider collateral borrowing with a maximum loan to value ratio the resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature

the disappearance of cooperatives from economics textbooks discussion of cooperatives abounded in early twentieth century economics textbooks but is virtually absent from their modern counterparts in this paper i assemble a dataset of economics textbooks used at the university of helsinki during 1905 2005 and examine how the treatment of cooperatives has changed and what factors have led to a neglect of cooperatives in textbooks the quality and quantity of the discussion on cooperatives is noted to be much greater in books published before world war ii than in post world war ii books i argue that the main reason for the decline is the paradigm shift from institutional to neoclassical analysis which led to a neglect of the potential of cooperatives in addressing social problems

corporate profitability and the dynamics of competition in emerging markets a time series analysis the paper presents time series analyses of corporate profitability in seven leading developing countries dcs using the common methodology of the persistence of profitability pp studies and systematically compares the results with those for advanced countries acs surprisingly both short and long term persistence of profitability for dcs are found to be lower than those for acs the paper concentrates on economic explanations for these findings it also reports the results on the persistence of the two components of profitability output capital ratios and profit margins these too raise important general issues of economic interpretation for pp studies which are outlined

unemployment risks and optimal retirement in an incomplete market we develop a new approach for solving the optimal retirement problem for an individual with an unhedgeable income risk the income risk stems from a forced unemployment event which occurs as an exponentially distributed random shock the optimal retirement problem is to determine an individual s optimal consumption and investment behaviors and optimal retirement time simultaneously we introduce a new convex duality approach for reformulating the original retirement problem and provide an iterative numerical method to solve it reasonably calibrated parameters say that our model can give an explanation for lower consumption and risky investment behaviors of individuals and for relatively higher stock holdings of the poor we also analyze the sensitivity of an individual s optimal behavior in changing her wealth level investment opportunity and the magnitude of preference for postretirement leisure finally we find that our model explains a countercyclical pattern of the number of unemployed job leavers

hedging in incomplete markets with hara utility in the context of merton s original problem of optimal consumption and portfolio choice in continuous time this paper solves an extension in which the investor is endowed with a stochastic income that cannot be replicated by trading the available securities the problem is treated by demonstrating using analytic and in particular viscosity solutions techniques that the value function of the stochastic control problem is a smooth solution of the associated hamilton jacobi bellman hjb equation the optimal policy is shown to exist and given in a feedback form from the optimality conditions in the hjb equation at zero wealth a fixed fraction of income is consumed for large wealth the original merton policy is approached we also give a sufficient condition for wealth under the optimal policy to remain strictly positive

precautionary saving and portfolio allocation dp by gmm abstract there is much research on consumption savings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but non stochastic labor income less is known quantitatively about the interaction between the two forms of risk under crra utility undiversifiable income risk should be reflected in both savings rates and portfolio allocations to quantify these effects in a model of consumption and portfolio choice we adopt a semi parametric projection method for solving dynamic programmes based on generalized method of moments estimation of the parameters of approximate decision rules we find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically

marx marxism and the cooperative movement this paper has a dual aim rst to draw attention to a number of passages inwhich marx explicitly extolled the cooperative movement and thereby confutethe wrong but widely held assumption that marx was inimical to the marketand rejected cooperation as a production mode even for the transition period second to argue that the continuing neglect of marxists both of the co operative movement and of the passages from marx and engels that presenta system of producer cooperatives as a new production mode can be tracedback in part to the late emergence of an economic theory of producercooperatives key words marx marxism socialism and cooperative movementjel classi cations b13 d23 d74

information theoretic approaches in economics economics has seen a recent rise in interest in information theory as an alternative framework to the conventional notion of equilibrium as a fixed state such as walrasian market clearing general equilibrium the information theoretic approach is predicated on the notion of statistical equilibrium se that takes a distribution over all possible states as an equilibrium and therefore predicts the endogenous fluctuations of the system along with its central tendency simultaneously for this reason se approaches can explain the observed data without relying on arbitrary assumptions about random noise and provide useful insights for many interesting economic problems that conventional methods have not been able to satisfactorily deal with in this paper we review the key elements of information theory focusing on the notions and applications of entropy and se in economics particularly paying attention to how entropy concepts open up a new frontline of economic research

firm growth and laplace distribution the importance of large jumps abstract recent empirical studies have shown that firm growth rate distribution is not gaussian but closely follows a laplace distribution this robust feature of the growth rate distribution challenges existing models based on gibrat s model because it predicts a gaussian distribution first we analyze more than 100 000 japanese firms and empirically show that the laplace shape can be observed for the japanese firms then by using the theory of stochastic processes we theoretically show that the absence of jumps causes the discrepancy between gibrat s model and the laplace shape in particular based on the laplace shape and the law of proportionate effect we show that the firm growth process is a jump process in other words firm growth cannot be explained by the consequence of many small shocks but is determined by a few large jumps the widely observed laplace distribution reflects this jump property of firm growth dynamics

does the persistence of profits persist a study of company profits in japan 1964 97 abstract earlier in a time series study of the profit rates of japanese manufacturing firms odagiri and yamawaki concluded that profits persist with the addition of 15 more years of data up to 1997 this conclusion is shown to stand the test of time in particular those firms estimated to earn higher than average long run profit rates in the early study were again estimated to earn higher than average long run profit rates the force of convergence was also found to be at work for instance the firms most profitable in period 1 1964 82 were most likely to face a decline in estimated long run profit rates from period 1 to period 2 1983 97 with the use of two sets of data the firm s profit performance was found to be positively related to measures of market share first among a smaller sample of firms for which reliable market share data could be matched market share was estimated to have a significant positive effect on long run profit rate in either period secondly among the entire sample of 357 firms the long run profit rate in either period was estimated to be positively associated with firm sales relative to industry sales which presumably is a crude measure of market share

asymmetric competition risk and return distribution abstract we propose a parsimonious statistical model of firm competition where structural differences in the strength of competitive pressure and the magnitude of return fluctuations above and below the system wide benchmark translate into a skewed subbotin or asymmetric exponential power aep distribution of returns to capital empirical evidence from us data illustrates that the aep distribution compares favorably to popular alternative models such as the symmetric or asymmetric laplace density in terms of goodness of fit when entry and exit dynamics of markets are taken into account

gibrat s law redux think profitability instead of growth we argue that firm profitability can be conveniently characterized by one and the same diffusion process for all firms akin to gibrat s seminal idea of a common stochastic description for the dynamics of firm growth here we show that the diffusion of profit rates applies across all surviving corporations irrespective of their size or industry which is not true for growth rates the diffusion process is empirically consistent with both the cross sectional distribution of profit rates and the individual time series of corporate profit rates leading to the notion of a statistical equilibrium this has stark and unexpected implications for our understanding of individual destinies since the model and data suggest that idiosyncratic efforts have no impact on the aggregate distributional outcome instead idiosyncratic efforts merely affect the individual persistence of abnormal profits from the system wide norm put differently corporations have to participate in the same game and can merely choose the speed at which they play it but they cannot bend the rules

nontraded assets in incomplete markets pricing and portfolio choice this paper examines portfolio choice and asset pricing when some assets are nontraded for instance when a country cannot trade claims to its output on world capital markets when a government cann

optimal environmental management in the presence of irreversibilities abstract we consider an environment of a fixed size that can be converted to another use this conversion can be made in steps but it is irreversible the future benefits per unit from the original use and from the alternative use follow a diffusion process for a fairly general case we show that the value function must be the unique viscosity solution to the associated hamilton jacobi bellman equation we also exhibit several properties of the solution for the case of constant relative risk aversion between 0 and 1 and a log linear diffusion for the benefits journal of economic literature classification numbers c61 d90 q30

heterogeneous background risks and portfolio choice evidence from micro level data we construct a set of household level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets these risks are in general statistically significant and economically important for a household s stock market participation and stockholdings a one standard deviation increase in background risks reduces the participation probability by 11 and the stockholdings to wealth ratio by 4 the volatilities of labor income housing value and business income reduce a household s participation and stockholdings a household with labor income highly correlated with stock bond returns is less more likely to invest in stock

health and other asset holdings despite clear evidence of correlations between financial and medical statuses and decisions most models treat financial and health related choices separately this article bridges this gap by proposing a tractable dynamic framework for the joint determination of optimal consumption portfolio holdings health investment and health insurance we solve for the optimal rules in closed form and capitalize on this tractability to gain a better understanding of the conditions under which separation between financial and health related decisions is sensible and of the pathways through which wealth and health determine allocations welfare and other variables of interest such as expected longevity or the value of health furthermore we show that the model is consistent with the observed patterns of individual allocations and provide realistic estimates of the parameters that confirm the relevance of all the main characteristics of the model

taxation risk taking and growth a continuous time stochastic general equilibrium analysis with labor leisure choice abstract this paper investigates the equilibrium relationship between taxation portfolio choice risk taking and capital accumulation specifically it examines how taxes affect risk taking and capital accumulation we extend the existing literature by relaxing two crucial assumptions in modelling risk taking behavior i that the investment opportunity set is fixed and ii that there is no distinction between attitudes towards risk and behavior towards intertemporal substitution we extend the investment opportunity set of individuals through optimally determined human capital and distinguish intertemporal substitution from attitudes towards risk via a recursive utility function in the presence of these extensions the paper successfully derives a closed form solution to the stochastic growth model with stochastic wage income

explicit solutions to an optimal portfolio choice problem with stochastic income abstract this paper solves in closed form the optimal portfolio choice problem for an investor with negative exponential utility over terminal wealth facing imperfectly hedgeable stochastic income the returns on income and the stock are imperfectly correlated so the market is incomplete we identify how an investor adjusts their merton rev econ statist 51 1969 247 portfolio of the stock and riskless asset via an intertemporal hedging demand in reaction to the stochastic income under general assumptions on the process governing the income the sign of the hedging demand is the opposite of the sign of the correlation between the income and stock the optimal portfolio in the stock is long stock if the risk premium is positive and correlation negative and short if these signs are reversed specializing in turn to normally distributed income and lognormally distributed income with or without mean reversion the effect of a number of parameters on the optimal portfolio in the stock can be studied when the risk premium on the stock and correlation have opposite signs the optimal portfolio decreases in magnitude with risk aversion unhedgeable variance of income and time and increases in magnitude with the magnitude of correlation under both the lognormal without mean reversion and normal models for income these relationships do not necessarily hold if the signs on the risk premium and correlation are the same in particular the optimal portfolio is not necessarily monotone in risk aversion violating well known static results in models without income when income follows a lognormal model with mean reversion more complicated behavior can occur for instance the optimal portfolio does not have to be monotonic in time regardless of the signs of correlation and the risk premium

a simple nonparametric approach to derivative security valuation canonical valuation uses historical time series to predict the probability distribution of the discounted value of primary assets discounted prices plus accumulated dividends at any future date then the axiomatically rationalized maximum entropy principle is used to estimate risk neutral equivalent martingale probabilities that correctly price the primary assets as well as any predesignated subset of derivative securities whose payoffs occur at this date valuation of other derivative securities proceeds by calculation of its discounted risk neutral expected value both simulation and empirical evidence suggest that canonical valuation has merit since the advent of the justly celebrated black scholes option pricing formula intense interest has focused on testing its implications there is consensus

innovation and corporate growth in the evolution of the drug industry abstract this work studies the processes of growth of the worlds top 150 pharmaceutical firms on the grounds of an original database which also allows disaggregate analysis at the level of single therapeutical classes and chemical entities our findings show that the industry whose long term evolution is driven by innovation imitation and permanent creation of new markets displays i fat tails in the distribution of growth shocks present at all levels of aggregation with relatively rare big spurs of growth ii a significant autocorrelation of growth rates iii a fall of variance of growth rates with size entirely dependent on corporate diversification patterns in turn plausibly shaped by the competence scope of each firm and iv different lifecycles of diverse types of products and persistent forms of heterogeneity across firms in terms of innovative output which however do not not seem to affect comparative growth performances

profit persistence in the very long run evidence from survivors and exiters one of the main shortcomings of the profit persistence literature is the fact that it looks only at surviving companies this paper uses a unique dataset to analyse profit persistence in two different samples of stationary series 85 surviving us companies from 1950 1999 and 72 exiters while the exiters perform more competitively than the survivors there is still significant evidence for profit persistence in both samples concentration and growth of the industry as well as size and volatility of profits seem to play an important role in explaining persistence

turnover activity in wealth portfolios we examine several subsets of the wealthiest individuals in the us and the uk that are compiled by forbes magazine and the sunday times since these are named subsets we can calculate the returns to wealth portfolios and calibrate a statistical equilibrium model of wealth distribution that accounts for the power law of wealth and the asymmetric laplace distribution of portfolio returns the model provides a relative measure of turnover activity that indicates how often changes in the composition of the wealthiest portfolios occur finally we investigate trends in equality mobility and turnover activity

consumption and portfolio policies with incomplete markets and short sale constraints the infinite dimensional case abstract we employ a martingale approach to study a dynamic consumption portfolio problem in continuous time with incomplete markets and short sale constraints we introduce a notion of minimax local martingale and transform the dynamic problem into a static problem of maximizing expected utility over the consumption bundles that satisfy a single budget constraint formed using that measure we establish the existence of and characterize the minimax local measure provide sufficient conditions for the dynamic consumption portfolio problem to have a solution and relate the optimal policies to the solution of quasi linear partial differential equation

quantitative empirical research in marxist political economy a selective review this paper surveys quantitative empirical research in some key areas of marxist political economy following an introductory section on the value controversy the paper surveys quantitative empirical research on the following topics a marxist national accounts b classical marxist theory of relative prices c probabilistic political economy d profitability analysis and e classical marxian theories of growth and technical change i end by highlighting two important puzzles in the extant literature

optimal consumption investment policies with undiversifiable income risk and liquidity constraints abstract this paper examines the continuous time optimal consumption and portfolio choice of an investor having an initial wealth endowment and an uncertain stream of income from non traded assets the income stream is not spanned by traded assets and the investor is not allowed to borrow against future income so the financial market is incomplete we solve the corresponding stochastic control problem numerically with the markov chain approximation method prove convergence of the method and study the optimal policies in particular we find that the implicit value the agent attaches to an uncertain income stream typically is much smaller in this incomplete market than it is in the otherwise identical complete market our results suggest that this is mainly due to the presence of liquidity constraints

optimal consumption and equilibrium prices with portfolio constraints and stochastic income abstract this paper examines the intertemporal optimal consumption and investment problem in the presence of a stochastic endowment and constraints on the portfolio choices short sale and borrowing constraints as well as incomplete markets can be modeled as special cases of the class of constraints we consider existence of optimal policies is established under fairly general assumptions on the security price coefficients and the individual s utility function this result is obtained by using martingale techniques to reformulate the individual s dynamic optimization problem as an equivalent static one an explicit characterization of equilibrium risk premia in the presence of portfolio constraints is also provided in the unconstrained case this characterization reduces to consumption based capital asset pricing model journal of economic literatureclassification numbers g11 g12 c61 d52 d91

invariances and diversities in the evolution of manufacturing industries this work explores and compares some basic properties of corporate growth process at both aggregate manufacturing level and disaggregated sectoral levels using an extensive dataset on italian manufacturing firms we investigate which properties of firm growth dynamics are robust under disaggregation we compare the results obtained with three different definitions of firm size namely total sales number of employees and value added our analysis suggests that while different sectors are characterized by significant differences in firm size distributions in the degrees of concentration and in the autoregressive structure of the growth processes there are also regularities which hold across all of them such as the approximate unit root nature of the growth process and the power exponential shape of the growth rates density together these stylized facts suggest challenging puzzles on the drivers of corporate growth and the resulting industrial structures