Pricing Physical Assets Internationally
Transferring physical capital and transferring production and sales activities from one country to the other typically entails large adjustment costs. The model of this paper features two homogeneous stocks of physical capital located in two different countries separated by an ‘ocean.’ The two physical stocks are optimally invested in a random production process yielding real returns, consumed by local residents, or transferred abroad. Retro-fitting, transferring and re-building capital equipment, and increasing production and sales abroad either takes time (during which capital is idle) or consumes real resources. As a result, the price of capital-consumption goods located in one place is not equal to that of goods located in the other place. The stochastic process for this deviation from the Law of One Price (LOP) is obtained. By construction, this process is compatible with financial market efficiency and with the possibility of (costly) trade in commodities. Whereas empirical studies have found no evidence against the hypothesis that LOP deviations follow a martingale, the theoretical process which I find, exhibits mean reversion (as well as a fair degree of conditional hetero-scedasticity) when investors are risk averse.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: 3254 Steinberg Hall-Dietrich Hall, Philadelphia, PA 19104-6367|
Phone: (215) 898-7616
Fax: (215) 573-8084
Web page: http://finance.wharton.upenn.edu/~rlwctr/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:12-88. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.