This paper is an analytic treatment of the abandonment decision in capital investment analysis. It provides a methodology which has application in obtaining better estimates for project value and risk.

Journal Article A Model of Short-Term Capital Movements, the Foreign Exchange Market and Official Intervention in the UK, 1963–1970 Get access John P. Hutton John P. Hutton University of York Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 44, Issue 1, February 1977, Pages 31–41, https://doi.org/10.2307/2296971 Published: 01 February 1977 Article history Received: 01 August 1974 Accepted: 01 February 1976 Published: 01 February 1977

Journal Article Comments on a Probabilistic Model of Social Choice Get access P. M. Rice P. M. Rice University of Georgia Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 44, Issue 1, February 1977, Pages 187–188, https://doi.org/10.2307/2296984 Published: 01 February 1977 Article history Received: 01 March 1974 Accepted: 01 December 1975 Published: 01 February 1977

This paper develops a Monte Carlo simulation method for solving option valuation problems. The method simulates the process generating the returns on the underlying asset and invokes the risk neutrality assumption to derive the value of the option. Techniques for improving the efficiency of the method are introduced. Some numerical examples are given to illustrate the procedure and additional applications are suggested.

[The chief difficulty in applying Aitken estimators to large linear systems stems from the dimensionality of the inverse. Here the conjugate gradient algorithm is applied to the problem, leading to substantial savings in storage and some savings in time. Given that the information matrix is not computed, an inference procedure is developed which involves two easily computed statistics which straddle the conventionally estimated standard errors. The paper is intended to open the way for the application of more efficient estimation procedures to large econometric systems.]

[This review of the work done on the formulation and estimation of complete systems of consumer demand functions is primarily concerned with problems and issues around this topic. These issues are partly of a theoretical and partly of an empirical nature. Constraints on such systems, derived from theoretical considerations, are used to deal with the problems of lack of sufficient data, but can sometimes also be tested. Among the various alternative approaches, as yet no clear-cut choice can be made, although it appears that additivity of preferences is too restrictive.]

RESEARCHERS using the Almon lag method (Almon, 1965) are generally familiar with the work by Schmidt and Waud (1973), wherein several of the pitfalls of Almon's method are considered. Among other things, Schmidt and Waud (SW however, they select different models with contradictory findings.2 The primary purpose of this study is to demonstrate that existing specification error tests allow a researcher to empirically determine if an incorrect length of lag and/or degree of polynomial has been chosen in Almon's method. In other words, the existence of a lagged relationship is a testable proposition within Almon's method, and at the same time it is generally possible to detect the use of an incorrect degree polynomial. As the result of this finding, there is an inferentially sound method of selecting parameters within the Almon lag technique. Empirical research based upon this parameter selection criterion demonstrates that specification error tests form a viable method of obtaining consistent and theoretically pleasing results within Almon's method (see Harper, 1975 and Harper and Fry, 1976). At least this is the finding within the single equation approach to the monetary versus fiscal policy debate. This promising viable parameter selection criterion stands in contradiction to and provides an alternative to the generally accepted belief that there is no inferentially sound method for selecting parameters within Almon's method.3 A close examination reveals that it is not always meaningful to search for both the length of lag and the degree of polynomial. It may well be the situation that the lag length is in fact a policy parameter and is, consequently, known to the researcher. If this is the situation, the parameter selection technique should be utilized only to select the degree of polynomial to be inserted with the known length of lag. In this manner, the researcher can determine the effects upon the dependent variable of a given lag length or of altering the lag length. It is necessary to rely upon theory to determine whether the length of lag is a known policy parameter or an endogenous variable that must be estimated. Received for publication December 31, 1975. Revision accepted for publication August 2, 1976. *The author is indebted to Thomas R. Saving, Michael J. McDonough, Oral B. Crawford and two anonymous referees for many helpful comments on an earlier draft of this paper. 'Some of the participants in this debate are Andersen and Jordan (1968, 1969), Andersen (1969), De Leeuw and Kalchbrenner (1969), Corrigan (1970), Silber (1971), and Schmidt and Waud (1973). 2Actually, Schmidt and Waud minimize the standard error of the regression, but this is identical to maximizing R 2. Note that such model selection criteria are precarious at best, since each of these criteria is biased in an unknown direction and reliance on such criteria is inferentially unsound. See Barten (1962), Frost (1975), Gilbert (1969), and Goldberger (1964) for verification of this claim. 3This is not meant to imply that Almon's method is the best distributed lag technique under all circumstances. The more general Shiller lag procedure is probably superior to Almon's method in many cases, because Shiller's method lessens the multicollinearity problem and characteristically imposes a smooth pattern of weights. However, there is at least one severe limitation of Shiller's method in that units of measurement affect empirical results. Unless one is working with differences in logs, or the like, it is recommended to use Almon's over Shiller's method.

For decision makers, we emphasize that it is feasible to consider multiple subjective criteria in a capital budgeting problem. The applicability of the procedures outlined is enhanced by the limited data base necessary to obtain subjective rankings, remembering that here we are only concerned with side criteria.In this paper, we have formulated the capital investment problem in a graph theoretic framework. We characterized the problem as being composed of a set of finite alternatives, a set of subjective criteria, and a set of resource constraints. This formulation leads to an integer programming problem in which the rankings of sets of alternatives on the multiple subjective criteria are aggregated into a single index. It is stressed that we used a single budgetary constraint in the example but that the procedure can accommodate additional constraints. We also assumed that management has specific side criteria and that it is possible for the decision makers to rank all alternatives for each of those criteria.The application of the above procedure to any problem involves three steps:1) From the decision maker, or groups of decision makers, the agreement matrix π is developed. This involves:a) defining the alternatives, b) defining the side criteria, c) asking management to rank each alternative under each criterion, andd) if appropriate, asking management to weigh the relative importance of each of the side criteria.2) From the technical considerations of the problem, determine the resource constraints. In our example, this included the investment requirements of each alternative and the total resources available.3) Solve the problem as posed above as a group of m integer programming problems.