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Random and Nonrandom Relationships Among Financial Variables: A Financial Model

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  • Murphy, Joseph E.
  • Nelson, J. Russell

Abstract

Careful examination of the behavior of financial variables over time uncovers an important distinction: variables expressed in dollars, such as earnings per share, behave very differently from percentage changes in those same variables. Similarly, financial ratios, such as the price/earnings ratio, behave quite differently from percentage changes in financial ratios. Variables expressed in dollars and financial ratios appear comparatively stable and predictable over time. Successive values are fair approximations of one another. Percentage changes in dollar and financial ratio variables-i.e., growth variables on the other hand, tend to be erratic, volatile, and unpredictable over time. Successive values bear little relation to one another. This distinction between dollar and ratio variables, on the one hand, and percentage changes in these variables-i.e., growth variables-on the other, serves as a useful basis for a financial model.

Suggested Citation

  • Murphy, Joseph E. & Nelson, J. Russell, 1971. "Random and Nonrandom Relationships Among Financial Variables: A Financial Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(2), pages 875-885, March.
    • Handle: RePEc:cup:jfinqa:v:6:y:1971:i:02:p:875-885_02
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