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Froot and Stein Revisited Once Again

Published online by Cambridge University Press:  10 May 2011

Montserrat Guillén ,
Nils Høgh ,
Jens Perch Nielsen  and
Ana M. Pérez-Marín
Montserrat Guillén
Affiliation:
Department of Econometrics RFA-IREA, University of Barcelona, Diagonal, 690 E-08034, Barcelona, Spain., Email: mguillen@ub.edu
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Abstract

Høgh, Linton and Nielsen (2006) showed that the famous result in the award winning paper of Froot and Stein (1998) is not correct in the sense that their result does not follow from their assumptions. In this paper we show that the economic intuition behind the paper of Froot and Stein (1998) is correct and that their result can be obtained when the market is reformulated in a continuous time setting and modern market theory is employed.

Keywords

Financial RiskCAPM Transaction Costs
Type
Papers
Information
Annals of Actuarial Science , Volume 3 , Issue 1-2 , September 2008 , pp. 121 - 126
Copyright
Copyright © Institute and Faculty of Actuaries 2008

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References

Björk, T. (2004). Arbitrage theory in continuous time. Oxford University Press.Google Scholar
Froot, K.A., Scharfstein, D.S. & Stein, J.C. (1993). Risk management: coordinating corporate investment and financing policies, The Journal of Finance, XLVIII(5), 1629–1658.CrossRefGoogle Scholar
Froot, K.A. & Stein, J.C. (1998). Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach, The Journal of Financial Economics, 47, 55–82.CrossRefGoogle Scholar
Høgh, N., Linton, O. & Nielsen, J.P. (2006). The Froot-Stein model revisited, Annals of Actuarial Science, 1(1).CrossRefGoogle Scholar