Steinar Ekern

On the theory of the firm in an economy with incomplete markets

This article establishes conditions sufficient to ensure that a decision of a firm is judged to be desirable by any one shareholder (e.g., the firms manager) if and only if every shareholder judges it to be desirable. One such condition is that the decision would not alter the set of distributions of returns available in the whole economy. Another is that shareholders are interested only in the mean and variance of the returns from their portfolios. The analysis allows for the possibility of incomplete markets.

Increasing Nth degree risk

Abstract Generalizing the Rothschild-Stiglitz increasing risk and the Menezes et al. increasing downside risk concepts, it still holds that G has more n th degree risk than F if and only if every n th degree risk averter prefers F to G .

An option pricing approach to evaluating petroleum projects

Abstract Option pricing applications in capital budgeting decisions are still in the development stage. This paper uses concepts and methods from option pricing theory to evaluate real projects rather than financial ones. Within a petroleum projects context such real options include development and operations of satellite fields, break-even values of incremental capacity, and flexibility value with compound development and operations options. The option pricing results may be quite different from those obtained by traditional capital budgeting and decision tree approaches. Some related papers on real options are also briefly noted.

Exotic Unit-Linked Life Insurance Contracts

This article integrates aspects of traditional insurance with advances in financial economics, yielding proper valuation and premium assessments of insurance benefits linked to various financial assets. Several new types of unit-linked life insurance contracts are discussed, with substantial potential for real-life applications. Compared to usual unit-linked products, these contracts offer added flexibility and/or altered exposure to financial risk for the insured and/or the insurer. The single premiums of these policies are calculated as expectations under a risk-adjusted probability measure (equivalent martingale measure), satisfying no-arbitrage conditions in financial markets.

Probabilities proportional to time-state prices

Abstract If probabilities and implicit prices of elementary state-contingent claims are proportional across states, any random income stream component is valued by discounting its expectation at the riskless rate. This lacking risk adjustment is explained by degeneracy in either market risk aversion or in randomness of aggregate consumption.

On the Theory of the Firm in an Economy with Incomplete Markets: An Addendum

This paper extends and summarizes the Ekern-Wilson unanimity theorem which gives conditions sufficient to ensure that all stockholders of a firm will unanimously approve or disapprove of a project.

Comparative statics and risk aversion

Abstract Assuming risk aversion, comparative statics properties of ‘new’ economic models may be readily available. Three propositions facilitate signing the optimal response of a control variable to changes in some structural parameter.

An Arbitrary Benchmark CAPM: One Additional Frontier Portfolio is Sufficient

The benchmark CAPM linearly relates the expected returns on an arbitrary asset, an arbitrary benchmark portfolio, and an arbitrary MV frontier portfolio. The benchmark is not required to be on the frontier and may be non-perfectly correlated with the frontier portfolio. The benchmark CAPM extends and generalizes previous CAPM formulations, including the zero beta, two correlated frontier portfolios, riskless augmented frontier, and inefficient portfolio versions. The covariance between the off-frontier benchmark and the frontier portfolio affects the systematic risk of any asset. Each asset has a composite beta, derived from the simple betas of both the asset and the benchmark.