Boundary Conditions for Ratios with Positively Distributed Components

Stuart McLeay

Journal of Business Finance & Accounting, 1997, vol. 24, issue 1, 67-84

Abstract: This paper describes the statistical properties of the ratio of two positively distributed variables where the numerator is a component of the denominator and where, therefore, the ratio has implicit boundaries of 0 and 1. Johnson's bounded distribution (the SB) is suggested as a model for ratios of this type, and is derived in this paper as a ratio of lognormal variates. An empirical analysis of bounded financial ratios of UK companies confirms the goodness of fit.

Date: 1997
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