Economics at your fingertips  

Axiomatization of residual income and generation of financial securities

Roberto Ghiselli Ricci and Carlo Alberto Magni ()

Quantitative Finance, 2014, vol. 14, issue 7, 1257-1271

Abstract: This paper presents an axiomatization of residual income, also known as excess profit, and illustrates how it can univocally give rise to fixed-income or variable-income assets. In the first part it is shown that, depending on the relations between excess profit and the investor's excess wealth, a well-specified theory of residual income is generated: one is the standard theory, which historically traces back to Hamilton and Marshall and is a deep-rooted notion in economic theory, finance, and accounting. Another is the systemic value added or lost-capital paradigm : first introduced by Magni, the theory is enfolded in Keynes's notion of user cost and is naturally generated by an arbitrage-theory perspective. In the second part, the paper inverts the usual analysis: instead of computing residual incomes from a pattern of cash flows, residual incomes are fixed first to derive vectors of cash flows. It is shown that variable- or fixed-income assets may be constructed on the basis of either theory starting from pre-determined growth rates for residual income. In particular, zero-coupon bonds and coupon bonds traded in a capital market are shown to be deduced as equilibrium vectors of residual-income-based assets.

Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Axiomatization of residual income and generation of financial securities (2009) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

Page updated 2019-10-08
Handle: RePEc:taf:quantf:v:14:y:2014:i:7:p:1257-1271