Knowledge that Transforms

I was interested to read Meyer and Kim [5], where I learned a little about sugar futures, but regret to say that I found the attempted Box-Jenkins analysis singularly lacking in expertise. It is my intention, here, to discuss a few of its most obvious shortcomings. My list will not be exhaustive, but will include just five points.

William R. Folks, Jr., Integrating International Finance into a Unified Business Program, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 4, Proceedings of the 1977 Western Finance Association Meeting (Nov., 1977), pp. 599-600

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A student of financial theory must always assume that managers will follow a course of action that will lead to a higher value of the firm rather than a lower value, given a choice between two courses of action. Yet, Lewellen and Racette (hereafter LR) in a recent paper [1] comparing the sale of convertible debentures with the sale of straight debt assumed that managers will behave in a way that will lead to submaximal firm value. The purpose of this paper is to correct the LR error.

A stock purchase warrant gives the owner the option to buy some predetermined number of shares of the associated common stock at a specified price over a stipulated time period. The specified price is called the exercise price of the warrant. The stipulated time period is quite variable, though the life of a typical warrant will exceed five years.

Mark R. Eaker, Teaching International Finance--An Economist's Perspective, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 4, Proceedings of the 1977 Western Finance Association Meeting (Nov., 1977), pp. 607-608

Prof. A. Carol examined a replacement problem in a paper published in the January 1972 issue of this journal.The aim of the author seems to be to obtain a precise insight in the pattern of quantities to be considered to take a rational decision.

Since we now have a data base approaching five years of more or less fluctuating exchange rates, there undoubtedly are numerous empirical studies under way comparing the movements of exchange rates with each other and with all sorts of other economic variables. A rather subtle problem with such activities is that the analysis is sensitive to which currency of an exchange rate one chooses to make the numeraire. Specifically, a time series of, say, dollars per pound sterling is not the same thing mathematically as a time series of pounds per dollar although the information content is the same. In particular it can be shown that

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 functionin the (μ, σ) plane, where F is the normal distribution, z = (s-μ)/σ