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ON THE CORRESPONDENCE BETWEEN THE BAUMOL‐TOBIN AND MILLER‐ORR OPTIMAL CASH BALANCE MODELS
Author(s) -
Bagamery Bruce D.
Publication year - 1987
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1987.tb00768.x
Subject(s) - cash , balance (ability) , economics , conjecture , miller , cash flow , econometrics , tobin's q , mathematical economics , microeconomics , mathematics , monetary economics , macroeconomics , finance , pure mathematics , geology , medicine , paleontology , physical medicine and rehabilitation
In this note, the author identifies a correspondence relationship between the Baumol‐Tobin (BT) and Miller‐Orr (MO) optimal cash balance frameworks and specifies the conditions under which both models imply the same level of optimal cash balances. Realistic applications of these models will concern net cash flows that exhibit behavior somewhere between the two extremes of BT entirely deterministic and MO completely random. The author demonstrates that if the correspondence relationship is satisfied, either the BT or the MO cash balance model can be employed since both models imply the same result. One conjecture open for empirical verification is that cash balance models perform more (less) adequately for groups of firms that satisfy (violate) the correspondence relationship.