Jan Mossin

Bio: Jan Mossin is an academic researcher from Norwegian School of Economics. The author has contributed to research in topics: Portfolio & Financial market. The author has an hindex of 12, co-authored 19 publications receiving 6964 citations.

Equilibrium in a capital asset market

Abstract: This paper investigates the properties of a market for risky assets on the basis of a simple model of general equilibrium of exchange, where individual investors seek to maximize preference functions over expected yield and variance of yield on their port- folios. A theory of market risk premiums is outlined, and it is shown that general equilibrium implies the existence of a so-called "market line," relating per dollar expected yield and standard deviation of yield. The concept of price of risk is discussed in terms of the slope of this line.

Aspects of Rational Insurance Purchasing

Abstract: Problems concerned with purchasing of insurance coverage appear to be a fascinating and potentially fruitful field for application and testing of theories of riskbearing. In this note we shall analyze a series of such problems from the point of view of an individual facing certain risks. Given his risk situation and his economic background (as measured by his initial wealth), his problem is to decide whether he should provide for in­surance coverage and, if so, how much.

Taxation and Risk-Taking: An Expected Utility Approach

Abstract: It is a popular notion that higher taxes tend to discourage risk-taking. In economic theory, however, the conclusions in this respect have been somewhat different. Thus, Tobin in his celebrated "Liquidity Preference as Behavior Towards Risk" [3] and Musgrave in his text-book [2]1 come to the conclusion that an increase in a proportional tax rate will, with full loss offset, increase the holding of the risky asset in a portfolio of a given size. Musgrave's analysis of the no-loss-offset case leads to the result that the direction of the effect is indeterminate. In this article these problems are re-examined on the basis of expected utility theory. There are two reasons why such a re-examination is justified. One is that it seems desirable to develop the analysis under assumptions about the investor's preference structure less restrictive than those made by Musgrave and Tobin. The other is that in spite of the greater generality of the expected utility approach, it is possible to sharpen some of the old conclusions, to derive some new ones, and to correct some erroneous ones. The analysis is inspired largely by the elegant treatment of portfolio choices by Arrow in [1]. The Pratt-Arrow measures of absolute and relative risk aversion are employed at various points in the analysis, and some familiarity with these concepts is assumed. (See Appendix.) Without any serious loss of generality, the discussion is restricted to portfolio choices involving two assets only. It is assumed, however, that the yield on one of these is non-stochastic, i.e. known with certainty. It may be true that in the real world no such asset exists, but when a general utility function is used this assumption is necessary in order to get a relatively simple measure of risk-taking, simply by using the amount invested in the riskless asset. One might of course compute and compare, say, the means and variances of two portfolios; but when it is not assumed that the investor is satisfied by letting himself be guided by the portfolio mean and variance only, it is clearly not to be expected that his behaviour can be summarized by these alone. The following notation is employed:

The Pricing of Options and Corporate Liabilities

Abstract: If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.

Moral Hazard and Observability

Abstract: The role of imperfect information in a principal-agent relationship subject to moral hazard is considered. A necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived, and a characterization of the optimal use of such information is given.

An intertemporal capital asset pricing model

Abstract: An intertemporal model for the capital market is deduced from the portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time. Explicit demand functions for assets are derived, and it is shown that, unlike the one-period model, current demands are affected by the possibility of uncertain changes in future investment opportunities. After aggregating demands and requiring market clearing, the equilibrium relationships among expected returns are derived, and contrary to the classical capital asset pricing model, expected returns on risky assets may differ from the riskless rate even when they have no systematic or market risk. ONE OF THE MORE important developments in modern capital market theory is the Sharpe-Lintner-Mossin mean-variance equilibrium model of exchange, commonly called the capital asset pricing model.2 Although the model has been the basis for more than one hundred academic papers and has had significant impact on the non-academic financial community,' it is still subject to theoretical and empirical criticism. Because the model assumes that investors choose their portfolios according to the Markowitz [21] mean-variance criterion, it is subject to all the theoretical objections to this criterion, of which there are many.4 It has also been criticized for the additional assumptions required,5 especially homogeneous expectations and the single-period nature of the model. The proponents of the model who agree with the theoretical objections, but who argue that the capital market operates "as if" these assumptions were satisfied, are themselves not beyond criticism. While the model predicts that the expected excess return from holding an asset is proportional to the covariance of its return with the market

Strategic Factor Markets: Expectations, Luck, and Business Strategy

Abstract: Much of the current thinking about competitive strategy focuses on ways that firms can create imperfectly competitive product markets in order to obtain greater than normal economic performance. However, the economic performance of firms does not depend simply on whether or not its strategies create such markets, but also on the cost of implementing those strategies. Clearly, if the cost of strategy implementation is greater than returns obtained from creating an imperfectly competitive product market, then firms will not obtain above normal economic performance from their strategizing efforts. To help analyze the cost of implementing strategies, we introduce the concept of a strategic factor market, i.e., a market where the resources necessary to implement a strategy are acquired. If strategic factor markets are perfect, then the cost of acquiring strategic resources will approximately equal the economic value of those resources once they are used to implement product market strategies. Even if such strategies create imperfectly competitive product markets, they will not generate above normal economic performance for a firm, for their full value would have been anticipated when the resources necessary for implementation were acquired. However, strategic factor markets will be imperfectly competitive when different firms have different expectations about the future value of a strategic resource. In these settings, firms may obtain above normal economic performance from acquiring strategic resources and implementing strategies. We show that other apparent strategic factor market imperfections, including when a firm already controls all the resources needed to implement a strategy, when a firm controls unique resources, when only a small number of firms attempt to implement a strategy, and when some firms have access to lower cost capital than others, and so on, are all special cases of differences in expectations held by firms about the future value of a strategic resource. Firms can attempt to develop better expectations about the future value of strategic resources by analyzing their competitive environments or by analyzing skills and capabilities they already control. Environmental analysis cannot be expected to improve the expectations of some firms better than others, and thus cannot be a source of more accurate expectations about the future value of a strategic resource. However, analyzing a firm's skills and capabilities can be a source of more accurate expectations. Thus, from the point of view of firms seeking greater than normal economic performance, our analysis suggests that strategic choices should flow mainly from the analysis of its unique skills and capabilities, rather than from the analysis of its competitive environment.