Short-lived Assets Research Articles

A continuous-time asset market game with short-lived assets

We propose a continuous-time game-theoretic model of an investment market with short-lived assets. The first goal of the paper is to obtain a stochastic equation which determines the wealth processes of investors and to provide conditions for the existence of its solution. The second goal is to show that there exists a strategy such that the logarithm of the relative wealth of an investor who uses it is a submartingale regardless of the strategies of the other investors, and the relative wealth of any other essentially different strategy vanishes asymptotically. This strategy can be considered as an optimal growth portfolio in the model.

Asymptotic minimization of expected time to reach a large wealth level in an asset market game

A stochastic game-theoretic model of a discrete-time asset market with short-lived assets and endogenous asset prices is considered. It is proved that the strategy which invests in the assets proportionally to their expected relative payoffs asymptotically minimizes the expected time needed to reach a large wealth level under the assumption that the total payoffs of the assets are i.i.d. and the relative payoffs are bounded away from zero.

SURVIVAL INVESTMENT STRATEGIES IN A CONTINUOUS-TIME MARKET MODEL WITH COMPETITION

We consider a stochastic game-theoretic model of an investment market in continuous time with short-lived assets and study strategies, called survival, which guarantee that the relative wealth of an investor who uses such a strategy remains bounded away from zero. The main results consist in obtaining a sufficient condition for a strategy to be survival and showing that all survival strategies are asymptotically close to each other. It is also proved that a survival strategy allows an investor to accumulate wealth in a certain sense faster than the competitors.

Do working capital management practices influence investment and financing patterns of firms?

PurposeThe present study aims to investigate the impact of working capital management (WCM) practices on the investment and financing patterns of listed nonfinancial companies in Pakistan for a span of 10 years.Design/methodology/approachThe study is based on secondary financial data of 354 listed nonfinancial Pakistani firms during the period of 2005–2014. The two-step generalized method of moment (GMM) regression estimation technique is employed to ensure the robustness of results.FindingsEmpirical testing reveals that: excessive funds tied up in working capital have a negative impact on the investment portfolio of sample firms. Besides, a negative relationship between change in fixed assets and excess net working capital posits that, eventually, firms use idle resources tied up in short-lived assets to boost their investment activities. Furthermore, larger working capital levels were associated with higher leverage ratio which indicates that firms with inefficient WCM policies have to rely heavily on long-term debt to meet their short-term financing requirements. Additional results indicate that firms that take more time to sell inventory and convert receivables to cash, make more use of debt. Results of cash management models illustrate that cash-rich firms have lower leverage levels which signal the strong financial health and internal revenue generation capability of such firms.Originality/valueThere is a dearth of empirical studies that examine the implications of WCM decisions on a firm's capital structure. Besides, these studies are only confined to how a WCM policy influences the long-term investment activities of a firm. The research contributes to the extant literature by empirically revealing a link between the WCM practices and the firm's long-range investment and financing patterns. Hence, financial managers shall account for the impact of their short-term financial management decisions on the capital structure of the firm.

Picosatellites for Maritime Security Applications - the Lambdasat Case

This study explores the potential deployment of small satellites for maritime interdiction and security applications by investigating the available solutions and formulating a generic proposal to optimize the use of those short-lived space assets in support of these operations. The operational background is analyzed with respect to the potential use of these systems by field officers. An analysis for operational micro and picosatellite characteristics is executed, and a brief outlook on the vulnerabilities of those for Low Earth Orbits is given. Moreover, a real scenario has been implemented, and the obtained computational results provide useful insight into how these space systems can be used for maritime security operations. Particular reference is given to the state-of-the-art status of propulsion systems capable of enhancing the lifetime of the satellites. Similarly, a literature survey has been conducted collecting all available picosatellites in orbit today that deal with maritime security applications. The study also explores the application of Lambdasat picosatellite (currently in orbit) to demonstrate the capability of exchanging alert messages between ground stations in Greece and in the US and vessels in the middle of the ocean. With these experiments we will demonstrate the ability magnitude of a picosatellite to support maritime operations.

Evolution and market behavior with endogenous investment rules

In a repeated market for short-lived assets, we investigate wealth-driven selection among investment rules that depend on endogenous market variables, such as current and past prices. We study the random dynamical system describing prices and wealth dynamics and characterize local stability of the long-run equilibria in which one or a group of traders dominate. Multiplicity of stable and unstable equilibria, leading to path dependency and persistent heterogeneity, turns out to be a common phenomenon generated by two different mechanisms. Firstly, conditioning investment decisions on endogenous market variables implies that the relative performance of investment rules, in terms of average growth rates, may be different for different prevailing prices, so that the market may fail to select a global winner. Secondly, the feedback existing between past asset prices and current investment decisions can lead to a form of deterministic overshooting.

Lyapunov Exponents for Position Dependent Random Maps: Formulae and Applications

In this article, we provide formulae for Lyapunov exponents of position dependent random maps of the interval. We then apply our results to a financial market model with short-lived assets.

Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices

This paper examines a canonical stochastic overlapping generations model with dynamically complete markets. Belief differences lead agents to place bets against each other and so wealth shifts across agents and across generations. Such changes in the wealth distribution strongly affect prices of long-lived assets since older generations have a lower propensity to save than younger generations. Contrary to the prices of long-lived assets, prices of short-lived assets are much less affected by the wealth distribution. Therefore, belief heterogeneity and life-cycle concerns are major forces contributing to the large gap between the volatility of stock returns and of the risk-free rate found in U.S. data.

Investment incentives and effective tax rates in the Philippines: a comparison with neighboring countries

This paper compares the general tax provisions and investment incentives in the Philippines to six other East Asian economies – Malaysia, Indonesia, Lao, Vietnam, Cambodia and Thailand. It finds that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. Two recently proposed tax reforms would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue would increase. Alternatively, replacing tax holidays with a general reduction in the corporate tax rate and accelerated depreciation would either not provide the same incentives or be very costly.

Investment Incentives and Effective Tax Rates in the Philippines: A Comparison with Neighboring Countries

We compare the general tax provisions and investment incentives in the Philippines to six other east-Asian economies-Malaysia, Indonesia, Lao, Vietnam, Cambodia, and Thailand. We calculate effective tax rates and find that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. We also consider recently-proposed tax reforms that would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue increases. Alternatively, replacing holidays with a general reduction in the corporate tax rate and offering accelerated depreciation will either not provide the same incentives or be very costly.

Investment Incentives and Effective Tax Rates in the Philippines: A Comparison with Neighboring Countries

We compare the general tax provisions and investment incentives in the Philippines to six other east-Asian economies - Malaysia, Indonesia, Lao, Vietnam, Cambodia, and Thailand. We calculate effective tax rates and find that general effective tax rates are relatively high in the Philippines, while investment incentives are comparable to those in neighboring countries. Tax holidays are most attractive for very profitable firms, creating redundancy, and for investment in short-lived assets. We also consider recently-proposed tax reforms that would replace tax holidays by a reduced corporate income tax rate or a low tax on gross receipts. The results suggest that this would result in stronger incentives to invest, while government revenue increases. Alternatively, replacing holidays with a general reduction in the corporate tax rate and offering accelerated depreciation will either not provide the same incentives or be very costly.

On the Evolution of Investment Strategies and the Kelly Rule—A Darwinian Approach*

This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term performance can emerge in markets populated by unsophisticated investors. Regardless whether the market is complete or incomplete and whether states are i.i.d. or Markov, the Kelly rule is obtained as the asymptotic outcome. With price-dependent rather than just state-dependent investment strategies, the market portfolio plays an important role as a protection against severe losses in volatile markets. In this paper, we pursue a Darwinian approach to the study of the evolution of investment strategies in financial markets with short-lived assets. The model comprises the two main processes, selection and reproduction, in a genetic programming framework. According to this approach, center stage is occupied by the population which embodies the investment skills of many individual strategies. Our investors are simple-minded and unsophisticated in the sense that they follow preprogrammed behavior rules which are the result of mutations and crossovers. This simplicity is a key factor, as it opens up the possibility of studying, in quite a realistic context, the validity of equilibrium predictions derived from theoretical models that impose strong assumptions on the market dynamics, as well as on individuals' rationality or learning behavior. Our approach complements these models by replacing their rationality assumptions with a Darwinian selection mechanism in

Market selection and survival of investment strategies

The paper analyzes the process of market selection of investment strategies in an incomplete market of short-lived assets. In the model under study, asset payoffs depend on exogenous random factors. Market participants use dynamic investment strategies taking account of the available information about current and previous events. It is shown that an investor allocating wealth across the assets according to their conditional expected payoffs eventually accumulates total market wealth, provided the investor’s strategy is asymptotically distinct from the portfolio rule suggested by the Capital Asset Pricing Model (CAPM). This assumption turns out to be essentially necessary for the result.

Evolutionary stability of portfolio rules in incomplete markets

This paper studies the evolution of wealth shares of portfolio rules in incomplete markets with short-lived assets. Prices are determined endogenously. The performance of a portfolio rule in the process of repeated reinvestment of wealth is determined by the wealth share eventually conquered in competition with other portfolio rules. Using random dynamical systems theory, we derive necessary and sufficient conditions for the evolutionary stability of portfolio rules. In the case of Markov (in particular i.i.d.) payoffs these local stability conditions lead to a simple portfolio rule that is the unique evolutionary stable strategy. This rule possesses an explicit representation. Moreover, it is demonstrated that mean–variance optimization is not evolutionary stable while the CAPM-rule always imitates the best portfolio rule and survives.

Whither Tax Depreciation?

In the 15 years since the depreciation rules were calcu- lated to approximate economic depreciation for structures and equip- ment, that neutrality (using a constant set of economic deprecia- tion estimates) has been somewhat undermined by a relatively more favorable treatment of equipment due to lower inflation and a length- ening of class lives for structures. An argument can be made that shorter lives for structures is in order; however, there is also a move- ment to provide tax benefits for equipment, which be- comes rapidly obsolescent. This focus on short-lived, high tech as- sets may be misplaced because the pace of technological advance is unlikely to be sustained at a high level, short-lived assets have a built-in protection against lives that are too long because their costs can be deducted on discard, and short-lived assets are likely to be less sensitive to changes in rate of return than are long-lived as-

Sustainable growth and distributable earnings under inflation

This paper examines the effect of inflation on the relationship between a firm’s sustainable real growth rate and its dividend payout ratio. Ceteribus paribus, dividend payout ratios are found to decrease monotonically with increasing inflation. The extent of the decline depends on the life of assets employed, being larger for firms employing short-lived assets. Analysts using constant growth models should expect either lower dividend payout ratios or lower dividend growth rates with increasing inflation.

Capital Composition Changes: Effects of Changing Haig-Simons Income Tax Rates

This article investigates changes in capital stock composition that are caused by Abstract changing statutory tax rates in a pure Haig-Simons net income tax. Such a tax system allows the deduction of economic depreciation. An increase in the statutory tax rate results in an increase in the effective tax rate, which in turn leads to a decrease in the demand for capital services and, eventually, a contraction of the capital stock. This contraction results in an increase in the marginal product of capital and the related pretax return to physical capital. Increasing pretax returns impact differently on the user cost of long-lived assets relative to that for short lived assets. At equilibrium, following the tax increase, there will be relatively fewer durable assets. In general, such compositional shifts are optimal responses to a second-best situation; in certain instances, however, such shifts are inefficient.

Inflation, Corporate Income Taxation, and the Demand for Capital Assets

The demand for capital is not systematically related to either the level or the rate of change of "effective" income tax rates on corporate capital assets. Rising inflation during the last 10 years has raised the user cost of capital for durable assets relative to that for short-lived assets even though this inflation has raised effective tax rates for more durable capital less than for short-lived assets. Even with replacement-cost depreciation allowances, the level and pattern of investment incentives probably will continue to vary with the inflation rate.

Optimal tax depreciation

Currently, solutions to the choice of depreciation methods for tax purposes are obtained through numerical simulation. This paper presents a simple capital budgeting technique which, in conjunction with Descartes' rule of signs, analytically derives the optimal regular depreciation method under the existing U.S. tax code. This technique is then used to determine the optimal depreciable life for short-lived assets and, finally, the analysis is extented to cover the choice of depreciation methods under the Class Life Asset Depreciation Range System.

A Proposal for Indexes for Traded Call Options

IN RECENT YEARS OPTIONS exchanges were organized in the U.S.A. (Chicago Board Options Exchange, AMEX, PBW Exchange, Midwest Exchange, Pacific Exchange) and Canada (Montreal Options Exchange, Toronto Exchange). A new market for trading options on leading European stocks was recently organized by the Amsterdam stock Exchange. The growing interest in options as an investment medium is apparent from the ever-increasing volume of trading on the exchanges and the plans to open new trading floors. Whereas for the stock markets there exist a few well accepted indexes, there are no parallels for the options markets.' The procedures for the construction of stock indexes2 cannot be applied directly to options because options are shortlived assets. The purpose of this paper is to develop indexes for traded call options. In Section 2 the characteristics of call options and the factors affecting their values over time are described. In Section 3, a general overview is provided of the use of indexes in describing economic phenomena. Both the objectives and the limitations of indexes are discussed. These principles are applied to the specific case of an option index, and the possible objectives of such an index are discussed. Two performance options indexes are proposed, one for the call buyer, and the other for the covered call writer.3 These indexes summarize the behavior of two popular strategies for trading options.4 Moreover, the two indexes reflect the two facets of call options: leverage and insurance.5 The procedure of constructing the indexes is specified in Section 4 and evaluated in Section 5V6 Finally, in Section 6, the potential uses and misuses of the proposed indexes are summarized.