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Separability of stochastic production decisions from producer risk preferences in the presence of financial markets

Listed author(s):
  • Chambers, Robert G.
  • Quiggin, John

This paper presents a unified treatment of the production and financial decisions available to a firm facing frictionless financial markets and a stochastic production technology under minimal assumptions on the firm's stochastic technology and objective function. The specific focus is on separation results for stochastic technologies, that is, on conditions under which the optimal production decision may be determined without regard to the risk preferences of the firm's owners. Necessary and sufficient conditions for separation, which generalize existing results, are presented. We show, among other results, that separation implies that the linear pricing of assets in the span of the market can be extended to encompass sets of assets outside of the span that are not perfectly replicable.

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File URL: http://purl.umn.edu/150348
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Paper provided by University of Queensland, School of Economics in its series Risk and Sustainable Management Group Working Papers with number 150348.

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Date of creation: 2003
Handle: RePEc:ags:uqsers:150348
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  1. Chambers, Robert G. & Quiggin, John, 2008. "Narrowing the no-arbitrage bounds," Journal of Mathematical Economics, Elsevier, vol. 44(1), pages 1-14, January.
  2. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  3. Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
  4. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  5. repec:arz:wpaper:eres1993-121 is not listed on IDEAS
  6. Chambers,Robert G. & Quiggin,John, 2000. "Uncertainty, Production, Choice, and Agency," Cambridge Books, Cambridge University Press, number 9780521622448, August.
  7. Clark, Stephen A., 1993. "The valuation problem in arbitrage price theory," Journal of Mathematical Economics, Elsevier, vol. 22(5), pages 463-478.
  8. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-1196, December.
  9. Sanford J. Grossman & Joseph E. Stiglitz, 1980. "Stockholder Unanimity in Making Production and Financial Decisions," The Quarterly Journal of Economics, Oxford University Press, vol. 94(3), pages 543-566.
  10. Ross, Stephen A, 1987. "Arbitrage and Martingales with Taxation," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 371-393, April.
  11. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-995, December.
  12. Robert G. Chambers & John Quiggin, 1998. "Cost Functions and Duality for Stochastic Technologies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(2), pages 288-295.
  13. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
  14. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  15. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
  16. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "Hedger Diversity in Futures Markets," Economic Journal, Royal Economic Society, vol. 93(37), pages 370-389, June.
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