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A MODEL OF THE MATURITY PROFILE OF THE BALANCE SHEET ( 1 )
Author(s) -
Grove Myron A.
Publication year - 1966
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.1966.tb00398.x
Subject(s) - maturity (psychological) , net worth , econometrics , variance (accounting) , economics , balance sheet , asset (computer security) , bond , variable (mathematics) , set (abstract data type) , expected return , net income , rate of return , balance (ability) , mathematics , financial economics , finance , computer science , portfolio , psychology , debt , developmental psychology , mathematical analysis , medicine , computer security , accounting , physical medicine and rehabilitation , programming language
In this paper, the expected return‐variance of return hypothesis of investment behavior is applied to the problem ot the wealth‐holder's choice of the maturity distributions of his assets and liabilities. It is assumed that the only asset forms available to the wealth‐holder are bonds homogeneous in all respects except: the dates on which they promise with certainty to pay their face values plus interest in a single lump sum. Bonds are assumed to be available from a continuous spectrm of maturities in infinitely divisible denominations. The wealth‐holder is assuined, in addition, to make risky forecasts of the future level of interest rates. Under these assumptions, the wealth‐holder's networth is a random variable with given mean and variance. Expected net‐worth and its variance are shown to be functions of a set of moments describing the distributions by maturity date of the wealth‐holder assets and liabilities, i. e., the wealth‐holder views the maturity distributions of his assets and liabilities as statistical frequency functions capable of being described by a set of statistical moments. These moments are then treated as the wealth‐holder's decision variables to be adjusted to maximize a utility function over expected net‐worth and its variance. Optima 1 values of these moments then describe the optimal maturity profile of the wealth‐holder's balance sheet.