This paper presents an axiomatization of residual income, also known as excess profit, and illustrates how it may univocally engenders fixed-income or variable-income assets. In the firstpart it is shown that, depending on the relations between excess profit and the investor's excess wealth, a well-specied theory of residual income is generated: one is the standard theory, whichhistorically traces back to Hamilton (1777) and Marshall (1890) and is a deep-rooted notion in economic theory, nance, and accounting. Another one is the systemic value added or lost-capital paradigm: introduced in Magni (2000, 2003), the theory is enfolded in Keynes's (1936) notion of user cost and is naturally generated by an arbitrage-theory perspective. In the secondpart, the paper reverts the usual analysis: instead of computing residual incomes prots from a pattern of cash flows, residual incomes are fixed rst to derive vectors of cash flows. It isshown that variable- or fixed-income assets may be constructed on the basis of either theory starting from pre-determined growth rates for excess prot. In particular, zero-coupon bondsand coupon bonds traded in a capital market are shown to be deducted as equilibrium vectors of residual-income-based assets.

Axiomatization of residual income and generation of financial securities / Ghiselli Ricci, R.; Magni, Carlo Alberto. - In: QUANTITATIVE FINANCE. - ISSN 1469-7688. - STAMPA. - 14:7(2014), pp. 1257-1271. [10.1080/14697688.2012.717415]

Axiomatization of residual income and generation of financial securities

MAGNI, Carlo Alberto
2014

Abstract

This paper presents an axiomatization of residual income, also known as excess profit, and illustrates how it may univocally engenders fixed-income or variable-income assets. In the firstpart it is shown that, depending on the relations between excess profit and the investor's excess wealth, a well-specied theory of residual income is generated: one is the standard theory, whichhistorically traces back to Hamilton (1777) and Marshall (1890) and is a deep-rooted notion in economic theory, nance, and accounting. Another one is the systemic value added or lost-capital paradigm: introduced in Magni (2000, 2003), the theory is enfolded in Keynes's (1936) notion of user cost and is naturally generated by an arbitrage-theory perspective. In the secondpart, the paper reverts the usual analysis: instead of computing residual incomes prots from a pattern of cash flows, residual incomes are fixed rst to derive vectors of cash flows. It isshown that variable- or fixed-income assets may be constructed on the basis of either theory starting from pre-determined growth rates for excess prot. In particular, zero-coupon bondsand coupon bonds traded in a capital market are shown to be deducted as equilibrium vectors of residual-income-based assets.
2014
14
7
1257
1271
Axiomatization of residual income and generation of financial securities / Ghiselli Ricci, R.; Magni, Carlo Alberto. - In: QUANTITATIVE FINANCE. - ISSN 1469-7688. - STAMPA. - 14:7(2014), pp. 1257-1271. [10.1080/14697688.2012.717415]
Ghiselli Ricci, R.; Magni, Carlo Alberto
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/632878
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