Axiomatization of residual income and generation of financial securities Report as inadecuate




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Abstract

This paper presents an axiomatization of residual income, aka excess profit, and illustrates how it may univocally engenders fixed-income or variable-income assets. In the first part it is shown that, depending on the relations between excess profit and the investor-s excess wealth, a well-specified theory of residual income is generated: one is the standard theory, which historically traces back to Hamilton 1777 and Marshall 1890 and is a deep-rooted notion in economic theory, finance, and accounting. Another one is the systemic value added or lost-capital paradigm: introduced in Magni 2000, 2003, the theory is enfolded in Keynes-s 1936 notion of user cost and is naturally generated by an arbitrage-theory perspective. In the second part, the paper reverts the usual analysis:instead of computing residual incomes profits from a pattern of cash flows, residual incomes are fixed first to derive vectors of cash flows. It is shown that variable- or fixed-income assets may be constructed on the basis of either theory starting from pre-determined growth rates for excess profit. In particular, zero-coupon bonds and coupon bonds traded in a capital market are shown to be deducted as equilibrium vectors of residual-income-based assets.



Item Type: MPRA Paper -

Original Title: Axiomatization of residual income and generation of financial securities-

Language: English-

Keywords: Residual income, excess profit, capital, arbitrage, bond-

Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial MarketsG - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest RatesM - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - AccountingG - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; CapacityG - Financial Economics > G0 - General > G00 - GeneralM - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business EconomicsC - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General-





Author: Ghiselli Ricci, Roberto

Source: https://mpra.ub.uni-muenchen.de/14438/







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