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Duality and liquidity constraints under uncertainty

Article Abstract:

A study was conducted to demonstrate that a dual formulation of the problem of maximizing expected lifetime utility subject to liquidity constraints generates a strong connection to the theory of marginal utility of wealth-constant demand functions or Frisch demands. The optimal policy is defined through a threshold value of assets below which expenditure uses up all beginning-of-period assets. The informational requirements of Frisch demand theory is characterized in the context of liquidity constraints. The dual approach is then applied to empirical settings.

Author: Ioannides, Yannis M., Hajivassiliou, Vassilis A.
Publisher: Elsevier B.V.
Publication Name: Journal of Economic Dynamics & Control
Subject: Economics
ISSN: 0165-1889
Year: 1996
Liquidity (Finance)

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Investment under alternative return assumptions; comparing random walks and mean reversion

Article Abstract:

Geometric Brownian Movement (GBM) offers tractable solutions for investment decisions and the rules for investment decisions are explicit. However, GBM has been under attack. It has not been found to be an effective equilibrium price process. The use of mean reversion is demonstrated. Investment rates under Geometric Mean Reversion (GMR) is compared with investment rates under GBM. Movement from GBM to GMR has offsetting effects.

Author: Metcalf, Gilbert E., Hassett, Kevin A.
Publisher: Elsevier B.V.
Publication Name: Journal of Economic Dynamics & Control
Subject: Economics
ISSN: 0165-1889
Year: 1995
Usage, Evaluation, Brownian motion, Random walks (Mathematics), Random walk theory

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Irreversible investment and uncertainty and scale economies

Article Abstract:

Irreversible investment is studied when profits experience multiplicative geometric Brownian shocks. Initially, the marginal product of capital rises and then decreases. It would be optimal to gradually add capacity as the shock surges to a threshold. The optimal policy in the increasing marginal product range follows the same multiple. Reference for economic growth and suboptimal equilibria in external economies are presented.

Author: Dixit, Avinash
Publisher: Elsevier B.V.
Publication Name: Journal of Economic Dynamics & Control
Subject: Economics
ISSN: 0165-1889
Year: 1995

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Subjects list: Analysis, Uncertainty, Research, Investments
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