Knowledge that Transforms

One of the problems which has plagued microeconomic theory is the difficulty in achieving close correspondence between formal models and practical market situations. The most widely accepted models envisage the firm set in a static mold with the implication that profits will be maximized in every period. The model is more generally acceptable in the case of perfect competition, for then the market results are most likely to be “as if” the firms acted marginally to maximize profits. Only the profit maximizers will survive. While such a scheme may lead to realistic results in the case of perfect competition, this condition does not bulk large in the United States economy.

Laurence Jay Mauer, Commercial Bank Maturity Demand for United States Government Securities and the Determinants of the Term Structure of Interest Rates, The Journal of Financial and Quantitative Analysis, Vol. 4, No. 1 (Mar., 1969), pp. 37-52

Robert H. Litzenberger, Charles P. Jones, Adjusting for Risk in the Capital Budget of a Growth-Oriented Company: Comment, The Journal of Financial and Quantitative Analysis, Vol. 4, No. 3 (Sep., 1969), pp. 301-304

The purpose of this study is to develop and estimate sectoral demand for money functions and an aggregate supply function for money within the framework of a simultaneous-equations model of major United States financial markets. The study is exploratory in nature in several respects. The final form of the behavioral equations is, of course, open to question. Also, the data used in the estimation of the behavioral equations have recently been revised by the Flow of Funds Section of the Federal Reserve Board.

It has been observed that when the level of interest rates rises all rates increase, but short-term rates rise systematically more than longterm rates. Over time, therefore, short-term rates experience wider fluctuations than long-term rates. This behavior, however, does not provide any clue as to which interest rate leads the other over the cycle. Most research on term structure of interest rates has focused on the yield curve at a point in time; little has been done to investigate the joint movement of short- and long-term interest rates through time. In this study, we compare the cyclical behavior of short-term and long-term interest rates in the United States during the period 1954–1967. The relationship between the 90-day Treasury bill rate and the 10-year U. S. Government bond rate is analyzed by the cross-spectral method.

The classic 1955 paper of Lorie and Savage has stimulated the development of mathematical programming approaches to the analysis of capital budgeting problems. A problem that they considered has been succinctly stated as:given the net present value of a set of independent investment alternatives, and given the required outlays for the projects in each of two time periods, find the subset of projects which maximizes the total net present value of the accepted ones while simultaneously satisfying a constraint on the outlays in each of the two periods.

Richard S. Bower, Ronald F. Wippern, Risk-Return Measurement in Portfolio Selection and Performance Appraisal Models: Progress Report, The Journal of Financial and Quantitative Analysis, Vol. 4, No. 4 (Dec., 1969), pp. 417-447

In retrospect, writing about “risk and valuation” is somewhat akin to killing Hydra, the mythical, many-headed creature which would grow two heads whenever one was cut off. It is only fair to admit at the outset that I cannot lay claim to have slain the beast. As a matter of fact, by the time the reader finishes the article, he may have concluded that the beast has more heads than ever!

Many students of business finance subsume the risks associated with a firm's income stream under two general cognomens, namely, “business risk” and “financial risk.”1 The degree of business risk associated with a firm's income stream is considered to be a function of all determinants of risk except those that relate to the means by which a firm's operations are financed (i.e., the nature of a firm's capital structure). In general, business risk is determined by a firm's asset structure, the purposes for which a firm's assets are used, and the efficiency and effectiveness with which a firm's assets are utilized. The determinants of business risk include the competitive position of a firm, the nature of a firm's operating expenses, the intensity of demand for a firm's products, and a firm's managerial resources, inter alia. A measurement of the variability of net operating income (i.e., earnings before interest expenses and income taxes) is usually employed as a surrogate of business risk.

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