Enrique R. Arzac

Portfolio choice and equilibrium in capital markets with safety-first investors

Abstract This paper develops optimal portfolio choice and market equilibrium when investors behave according to a generalized lexicographic safety-first rule. We show that the mutual fund separation property holds for the optimal portfolio choice of a risk-averse safety-first investor. We also derive an explicit valuation formula for the equilibrium value of assets. The valuation formula reduces to the well-known two-parameter capital asset pricing model (CAPM) when investors approximate the tail of the portfolio distribution using Tchebychevs inequality or when the assets have normal or stable Paretian distributions. This shows the robustness of the CAPM to safety-first investors under traditional distributional assumptions. In addition, we indicate how additional information about the portfolio distribution can be incorporated to the safety-first valuation formula to obtain alternative empirically testable models.

A Quarterly Econometric Model of United States Livestock and Feed Grain Markets and Some of Its Policy Implications

This paper discusses the structural equations, forecasting properties, dynamic characteristics, and economic policy implications of a quarterly econometric model of U.S. livestock and feedgrain markets. Quarterly, semi-annual, and annual endogenous variables are incorporated by allowing individual structural equations to be estimated and to enter into the solution of the model with different periodicities. Commodity prices are determined by market equilibrium conditions rather than by autoregressive and other time-series techniques. Dynamic multipliers give the effect of changes in corn exports, beef imports, government grain stocks, corn yield, consumer income, and the support price for corn on producer and retail prices and acreage planted.

PROFITS AND SAFETY IN THE THEORY OF THE FIRM UNDER PRICE UNCERTAINTY

THIS PAPER studies quantity-setting behavior under price uncertainty when preferences are based upon expected profits and the probability of loss. These preferences have been suggested over the years by several authors [1], [5], [6], [9], [10], [13] as alternatives to the abstract notion of a utility function and are not generally compatible with the axioms of utility theory.1 Previous studies on the subject have been based on the restrictive assumption of normality or on Tchebychevs inequality.2 This paper derives exact distribution-free results by the straightforward use of the monotonicity property of distributions. Section 2 presents the equilibrium conditions of competitive and monopolistic firms under alternative profit-safety preferences. It shows that the conclusions of Day, Aigner and Smith [5] are valid for arbitrary distributions under a rather general form of price uncertainty, which includes both additive and multiplicative uncertainty as special cases. Section 3 derives the comparative statics properties of the solutions for changes in fixed costs, price and taxes and shows that the response of optimal output depends critically on the form of the preference function. Section 4 compares the results of this paper with those of traditional theory and expected utility maximization.

Stabilization policies for united states feed grain and livestock markets

This paper studies economic policy toward feed grain and livestock markets by applying optimal control theory to a quarterly microeconometric model. The results indicate that: (1) farm prices and the retail cost of meat can be stabilized by optimal control relative to unregulated markets, (2) the support price for corn and beef import controls are the most effective instruments while management of corn stocks is neither necessary nor a substitute for other instruments, (3) beef import controls are essential to stabilize producer prices for livestock commodities and (4) there is a definitive limit to the stabilization gain that can be achieved by a more intensive use of the instruments.

Income Insurance with Uncertain Output

This paper examines the properties of a market solution to the output uncertainty problem faced by unincorporated primary producers. An insurance contract is formulated and shown to provide income insurance to producers without exposing insurers to moral hazard. The equilibrium relative to this contract is shown to be equivalent to that effected by a stock market available to all producers. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

A Mechanism for the Allocation of Corporate Investment

Corporate investment in an economy without a complete set of contingent claims markets has the characteristic of a public good in the sense that the stockholders’ consumption planscannot be separated from, but depend on, the specific investment plans of the firms. Dreze [4] has shown that a constrained Pareto optimal (CPO) allocation of investment in a stock market economy must satisfy a generalization of the Samuelson [24] condition for efficient production of public goods: the investment plan should maximize a weighted sum of the stockholders’ personal valuations of future output minus current input cost. However, except for those special cases in which CPO investment plans are unanimously supported by stockholders (see [17], [20], and [2]), the theory of the firm in incomplete markets lacks a suitable maximization criterion. Although the Dreze-Samuelson condition is a most appealing candidate, it is not unanimously preferred by stockholders, each of whom prefers that his or her own valuation of future output receives all the weight in the investment decision. Furthermore, the application of the Dreze-Samuelson condition depends on the correct revelation of stockholders’ preferences, which, in the absence of special inducements, cannot be expected from economic agents.

Utility Analysis of Chance-Constrained Portfolio Selection: A Correction

In [1, p. 999] I wrongly stated that “the solution locus generated by the chance-constrained problem is efficient (for the class of utility function implied by the expected wealth-probability of ruin criterion) if the assets follow a multinomial distribution with means above the survival level.” In support of this statement footnote 6 of [1] attempted to establish the quasiconcavity of the expected utility function in the (μ, σ) plane, where F is the normal distribution, z = (s-μ)/σ was claimed to hold for any two assets (μ 1 ., σ 1 ) and (μ 2 ., σ 2 ) on any given indifference curve of (1), where z i . = (s-μ i .)/σ i ., i = 1,2, and z γ = (s−μ γ )/σγ corresponds to the convex combination μ γ = γμ 1 + (1−γ) μ 2 , σ γ = γσ 1 + (1−γ) σ 2 , in the (μ, σ) plane. (Note that this is not the same as asserting that F(z) is a convex function of μ and σ, which it is not as an examination of its Hessian determinant would readily show.)

Financing in the Global Capital Market

Dieser Beitrag untersucht die Finanzierungsmoglichkeiten, die einem Aktien ausgebenden Unternehmen auf dem internationalen Kapitalmarkt zur Verfugung stehen. Die wichtigsten Komponenten des globalen Kapitalmarktes werden untersucht, wobei speziell den Moglichkeiten und Schwierigkeiten, die sich dabei fur Erstemittenten ergeben, besondere Beachtung geschenkt wird. Die untersuchten Markte umfassen die wesentlichen Borsenanlagenbereiche (Bonds, equity und hybrid securities) in Europa und den USA wie auch Handels- und Projektfinanzierung. Der Beitrag schliest mit einem Abris uber Eintrittsstrategien fur Erstemittenten auf Basis der Erfahrungen erfolgreicher, weltweit tatiger Emittenten.

Class shares and economies of scope

Abstract This paper examines the allocative role of class shares that pay dividends based upon the performance of the individual activities of multi-activity firms. The firms considered operate under economies of scope and technological uncertainty in an incomplete asset market. Investor unanimity about the choice of production plans and a constrained Pareto optimum are attained when all firms in the economy issue a class of shares for each of their activities. Partial issuance of class shares leads to a Pareto superior allocation if the ensuing changes in production plans are individually rational.