A Corrparison of

Alan J. Marcus, David M. Modest, The Valuation of a Random Number of Put Options: An Application to Agricultural Price Supports, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 1 (Mar., 1986), pp. 73-86

A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.

This paper investigates the use of futures prices in making production decisions. We derive a preference-independent production rule for firms that face both demand and production uncertainty. This rule is compared to a simple "marginal cost equals future price" rule, which previously has been suggested for firms with deterministic output. Data for agricultural producers are used to examine the importance of output uncertainty in the determination of the proper production rule. Our analysis suggests that for many crops the simple rule is sufficiently accurate to be a useful guide to production.