The expected utility of the doubling strategy

Article Abstract:

It has been noted that a certain continuous time-trading strategy, termed the "doubling strategy", generates a positive net return on borrowed funds, with probability one and within a finite period of time. Since the doubling strategy seems to represent a "free lunch" or arbitrage opportunity, a variety of constraints to render it infeasible have been proposed. In this paper, we show that the doubling strategy generates infinite disutility for a large class of utility functions, and we can think of no utility function for a risk-averse agent which is a counterexample. (Reprinted by permission of the publisher.)

Stocks, Arbitrage

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Debt and input misallocation

Article Abstract:

We investigate a class of agency costs of debt that arise because debt financing affects the firm's incentives to use inputs efficiently. A methodology for estimating this class of costs is presented and applied to a major industry, air transport. Our results are consistent with agency models that predict a decrease in efficiency as the debt increases. A part of the loss of efficiency that we identify is attributable to the greater use by leveraged firms of inputs that can be monitored and are collateralizable. (Reprinted by permission of the publisher.)

Management, Finance, Airlines, Corporations, Corporate finance, Financial management, Debt financing (Corporations), Debt financing

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