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wkh yduldqfh ri wkh sruwirolr uhwxuq lv 2| 2| 1 Vxevwlwxwlqj lqwr wkh remhfwlyh
56
ixqfwlrq +514;,/ wkh sureohp ehfrphv

4 4
pd{ | +H| u|n usc|n , . | +4 | , 2| . +4 ,2| 2| = +5157,
5 5
Wkh vroxwlrq lv
H| u|n usc|n . 2| @5
| @ = +5158,
2|
Wklv htxdwlrq lv wkh htxlydohqw/ lq d orjqrupdo prgho zlwk srzhu xwlolw|/
ri wkh phdq0yduldqfh vroxwlrq +517,1 Wkh wrs olqh lv wkh h{shfwhg h{fhvv
orj uhwxuq rq wkh ulvn| dvvhw/ zlwk wkh dgglwlrq ri rqh0kdoi wkh yduldqfh wr
frqyhuw iurp orj uhwxuqv wr vlpsoh uhwxuqv wkdw duh xowlpdwho| ri frqfhuq
wr wkh lqyhvwru1 +Wkh irupxod iru wkh h{shfwdwlrq ri orjqrupdo udqgrp
yduldeohv lpsolhv wkdw H| u|n usc|n . 2| @5 @ orjH| +4 . U|n ,@+4 . Us | ,1,
Wkh erwwrp olqh lv wkh frhflhqw ri uhodwlyh ulvn dyhuvlrq wlphv wkh yduldqfh
ri wkh ulvn| dvvhw uhwxuq1 Wkxv/ mxvw dv lq d vlpsoh phdq0yduldqfh prgho/
wkh rswlpdo sruwirolr zhljkw lv wkh ulvn suhplxp glylghg e| ulvn dyhuvlrq
wlphv yduldqfh1
Lq d prgho zlwk pdq| ulvn| dvvhwv/ wkh vroxwlrq iru wkh yhfwru ri rswlpdo
sruwirolr zhljkwv lv
4 3
| @ +H| u|n usc|n . 2| @5,= +5159,
|
Wklv vroxwlrq lv wkh htxlydohqw ri wkh pxowlsoh0dvvhw phdq0yduldqfh vroxwlrq
+51;,1 Olnh wkh phdq0yduldqfh vroxwlrq/ lw kdv wkh surshuw| wkdw wkh frh0
flhqw ri uhodwlyh ulvn dyhuvlrq rqo| dhfwv wkh ryhudoo vfdoh ri wkh ulvn| dvvhw
srvlwlrq dqg qrw lwv frpsrvlwlrq1 Wkxv d yhuvlrq ri Wrelq*v pxwxdo ixqg
wkhruhp krogv lq wkh orjqrupdo prgho zlwk srzhu xwlolw|1
Li wkhuh lv qr wuxo| ulvnohvv dvvhw/ dqg zh zrun lqvwhdg zlwk d ulvn|
ehqfkpdun uhwxuq ufc|n / wkhq wkh vroxwlrq ehfrphv

4 3 4
2
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| f| ,> +515:,

zkhuh f| lv wkh yhfwru ri fryduldqfhv ri h{fhvv orj uhwxuqv zlwk wkh ehqfk0
pdun orj uhwxuq1 Mxvw dv lq wkh vlpsoh phdq0yduldqfh dqdo|vlv +51<,/ fr0
yduldqfhv zlwk wkh ehqfkpdun dhfw wkh rswlpdo sruwirolr zhljkwv1 Wkh
lqyhvwru idyruv dvvhwv zlwk srvlwlyh fryduldqfhv ehfdxvh/ iru jlyhq h{shfwhg
orj uhwxuqv/ wkh| lqfuhdvh wkh h{shfwhg vlpsoh uhwxuq rq wkh sruwirolr> exw
wkh lqyhvwru glvolnhv vxfk dvvhwv ehfdxvh wkh| lqfuhdvh wkh ulvn ri wkh sruw0
irolr1 Wkh wzr hhfwv fdqfho zkhq @ 4> lq wklv fdvh wkh vroxwlrq wdnhv
57
h{dfwo| wkh vdph irup zkhwkhu wkh ehqfkpdun dvvhw lv ulvnohvv ru ulvn|1 Dv
lqfuhdvhv wkh rswlpdo sruwirolr dssurdfkhv wkh plqlpxp0yduldqfh sruwirolr
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22 )LTU *L?}|ih4 TLh|uL*L ULUi

22 Lih |*|) Lu i@*|
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fduhv rqo| derxw wkh glvwulexwlrq ri zhdowk dw wkh hqg ri wkh qh{w shulrg1
Dowhuqdwlyho|/ zh fdq dvvxph wkdw wkh lqyhvwru fduhv derxw wkh glvwulexwlrq
ri zhdowk N shulrgv iurp qrz/ vr wkdw wkh xwlolw| ixqfwlrq lv X+Z|ng , udwkhu
wkdq X+Z|n ,1 Zh frqwlqxh wr dvvxph wkdw doo zhdowk lv uhlqyhvwhg/ vr wkh
exgjhw frqvwudlqw wdnhv wkh irup
Z|ng @ +4.URgc|ng ,Z| @ +4.URc|n ,+4.URc|n2 ,===+4.URc|ng ,Z| = +515;,
Khuh wkh qrwdwlrq +4 . URgc|ng , lqglfdwhv wkdw wkh sruwirolr uhwxuq lv phd0
vxuhg ryhu N shulrgv/ iurp w wr w . N1 Wklv N0shulrg uhwxuq lv mxvw wkh
surgxfw ri N vxffhvvlyh 40shulrg uhwxuqv1 Qrwh wkdw wklv lv d fxpxodwlyh
uhwxuq> wr fdofxodwh dq dqqxdol}hg uhwxuq rqh zrxog wdnh wkh Nwk urrw li wkh
edvh shulrg lv d |hdu/ wkh +N@7,wk urrw li wkh edvh shulrg lv d txduwhu/ dqg
lq jhqhudo wkh +N@V,wk urrw li wkhuh duh V edvh shulrgv lq d |hdu1 Wdnlqj
orjv/ wkh fxpxodwlyh orj uhwxuq ryhu N shulrgv lv mxvw d vxp ri N 40shulrg
uhwxuqv=
uRgc|ng @ uRc|n . === . uRc|ng = +515<,
Wkh dqqxdol}hg orj uhwxuq fdq eh irxqg e| glylglqj e| +N@V, li wkhuh duh V
edvh shulrgv lq d |hdu1
Wkh orqj0whup lqyhvwru*v rswlpdo sruwirolr ghshqgv qrw rqo| rq klv re0
mhfwlyh/ exw dovr rq zkdw kh lv doorzhg wr gr hdfk shulrg1 Lq sduwlfxodu/ lw
ghshqgv rq zkhwkhu wkh lqyhvwru lv doorzhg wr uhedodqfh klv sruwirolr hdfk
shulrg/ ru pxvw fkrrvh dq doorfdwlrq dw wlph w zlwkrxw dq| srvvlelolw| ri
dvvhw vdohv ru sxufkdvhv ehwzhhq w dqg wkh krul}rq w . N1
P|rslf sruwirolr fkrlfh zlwkrxw uhedodqflqj
Zh uvw dvvxph wkdw uhedodqflqj lv qrw srvvleoh ehwzhhq w dqg w . N/

vr wkdw wkh orqj0whup lqyhvwru pxvw hydoxdwh N0shulrg uhwxuqv lq wkh vdph
pdqqhu wkdw wkh vkruw0whup lqyhvwru hydoxdwhv vlqjoh0shulrg uhwxuqv1 Zh
frqwlqxh wr dvvxph wkdw xwlolw| wdnhv wkh srzhu irup dqg wkdw dvvhw uhwxuqv
58
duh frqglwlrqdoo| orjqrupdoo| glvwulexwhg1 Iru vlpsolflw| zh uhwxuq wr wkh

fdvh zkhuh wkhuh lv d vlqjoh ulvn| dvvhw1
Zh qrz pdnh d kljko| uhvwulfwlyh dgglwlrqdo dvvxpswlrq/ wkdw doo dvvhw
uhwxuqv duh lqghshqghqw dqg lghqwlfdoo| glvwulexwhg +LLG, ryhu wlph1 Wklv
lpsolhv wkdw wkh orj ulvnohvv udwh lv d frqvwdqw us dqg wkh orj N0shulrg ulvnohvv
uhwxuq lv Nus > wkh phdq orj uhwxuq rq wkh ulvn| dvvhw lv d frqvwdqw Hu dqg
wkh phdq orj N0shulrg uhwxuq rq wkh ulvn| dvvhw lv NHu> wkh yduldqfh ri wkh
orj uhwxuq rq wkh ulvn| dvvhw lv d frqvwdqw 2 dqg wkh ulvn| dvvhw uhwxuq lv
vhuldoo| xqfruuhodwhg/ vr wkh yduldqfh ri wkh orj N0shulrg uhwxuq rq wkh ulvn|
dvvhw lv mxvw N2 =
Ydu| ugc|ng @ Ydu| u|n . === . Ydu| u|ng @ N2 = +5163,
Khuh wkh uvw htxdolw| iroorzv iurp wkh devhqfh ri vhuldo fruuhodwlrq lq ulvn|
uhwxuqv/ dqg wkh vhfrqg iroorzv iurp wkh frqvwdqw yduldqfh ri wkh ulvn| uh0
wxuq1
Zlwk LLG uhwxuqv/ wkhq/ wkh pdsslqj iurp vlqjoh0shulrg orj uhwxuqv wr N0
shulrg orj uhwxuqv lv vwudljkwiruzdug1 Doo phdqv dqg yduldqfhv iru lqglylgxdo
dvvhwv duh vfdohg xs e| wkh vdph idfwru N1 Li zh fdq dsso| wkh vdph
dssur{lpdwlrq +5154, uhodwlqj lqglylgxdo dvvhw uhwxuqv wr wkh sruwirolr uhwxuq/
wklv lpsolhv wkdw wkh suhylrxv vkruw0whup sruwirolr vroxwlrq lv vwloo rswlpdo
iru d orqj0whup lqyhvwru1 Lqwxlwlyho|/ wkh rswlpdo sruwirolr zhljkw rq d
ulvn| dvvhw lv wkh phdq h{fhvv orj uhwxuq/ soxv rqh0kdoi wkh orj yduldqfh
wr frqyhuw iurp phdq orj wr phdq vlpsoh uhwxuq/ glylghg e| ulvn dyhuvlrq
wlphv yduldqfh1 Li erwk wkh phdq dqg wkh yduldqfh duh pxowlsolhg e| N/
wklv vroxwlrq grhv qrw fkdqjh1 Wkh dujxphqw fdq uhdglo| eh h{whqghg wr
wkh fdvh zlwk pxowlsoh ulvn| dvvhwv1 Erwk wkh vkruw0whup lqyhvwru dqg wkh
orqj0whup lqyhvwru shufhlyh wkh vdph phdq0yduldqfh gldjudp/ phuho| vfdohg
xs ru grzq e| d idfwru N> wkxv wkh| fkrrvh wkh vdph srlqw rq wkh gldjudp/
wkdw lv/ wkh| fkrrvh wkh vdph sruwirolr1
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exgjhw frqvwudlqw +5154, dssolhv wr d orqj kroglqj shulrg1 Uhfdoo wkdw
wklv exgjhw frqvwudlqw krogv h{dfwo| lq frqwlqxrxv wlph/ dqg lv dq dffxudwh
dssur{lpdwlrq ryhu vkruw glvfuhwh wlph lqwhuydov> exw wkh txdolw| ri wkh ds0
sur{lpdwlrq ghwhulrudwhv li lw lv dssolhg ryhu orqj kroglqj shulrgv1 Iru wklv
uhdvrq dq h{dfw vroxwlrq wr wkh orqj0whup sruwirolr fkrlfh sureohp zlwkrxw
uhedodqflqj grhv lqyroyh vrph krul}rq hhfwv hyhq li ulvn| uhwxuqv duh LLG1
Lq sudfwlfh/ krzhyhu/ wkhvh krul}rq hhfwv duh vpdoo1

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P|rslf sruwirolr fkrlfh zlwk uhedodqflqj
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lqwhuphgldulhv h{lvw wr uhedodqfh sruwirolrv rq ehkdoi ri lqyhvwruv zkr qg
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zh qrz dvvxph wkdw wkh orqj0whup lqyhvwru fdq uhedodqfh klv sruwirolr hyhu|
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ri frqglwlrqv xqghu zklfk wkh orqj0whup lqyhvwru dfwv p|rslfdoo|/ fkrrvlqj
wkh vdph sruwirolr dv d vkruw0whup lqyhvwru1 Sruwirolr fkrlfh zloo eh p|rslf/
uvw/ li wkh lqyhvwru kdv srzhu xwlolw| dqg uhwxuqv duh LLG1 Wklv uhvxow zdv
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lqwxlwlyh dujxphqw1
Zh uvw uhfdoo wkdw zlwk frqvwdqw uhodwlyh ulvn dyhuvlrq/ sruwirolr fkrlfh
grhv qrw ghshqg rq zhdowk/ dqg khqfh grhv qrw ghshqg rq sdvw uhwxuqv1
Qh{w zh qrwh wkdw li uhwxuqv duh LLG/ qr qhz lqirupdwlrq duulyhv ehwzhhq
rqh shulrg dqg wkh qh{w vr wkhuh lv qr uhdvrq iru sruwirolr fkrlfh wr fkdqjh
ryhu wlph lq d udqgrp idvklrq1 Zh fdq wkhuhiruh uhvwulfw dwwhqwlrq wr
ghwhuplqlvwlf sruwirolr uxohv lq zklfk wkh ulvn| dvvhw vkduh | pd| ghshqg
rq wlph1 Zh dovr qrwh wkdw N0shulrg uhwxuqv duh orjqrupdo li vlqjoh0shulrg
uhwxuqv duh orjqrupdo dqg LLG1 Wklv phdqv wkdw wkh srzhu0xwlolw| lqyhvwru
fkrrvhv d sruwirolr rq wkh edvlv ri wkh phdq dqg yduldqfh ri wkh N0shulrg
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zkhuh zh duh doorzlqj | dqg |n wr eh glhuhqw ehfdxvh wkh lqyhvwru fdq
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vlqfh erwk | dqg |n duh ghwhuplqlvwlf dqg khqfh duh nqrzq dw wlph w1
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Wkh remhfwlyh ri d 50shulrg lqyhvwru zlwk srzhu xwlolw| fdq eh zulwwhq dv
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phdq ghshqgv rqo| rq wkh vxp +| .|n ,1 Wkh lqyhvwru fdq { wklv vxp dqg
dgmxvw wkh lqglylgxdo vkduhv/ | dqg |n / wr plqlpl}h wkh yduldqfh1 Vlqfh
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vhwwlqj | @ |n / d frqvwdqw sruwirolr uxoh1
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lw pxvw eh wkh vdph dv wkh rswlpdo uxoh iru d vkruw0whup lqyhvwru1 Wkh
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X +F| , @ H| ^X +F|n ,+4 . Uc|n ,`> +516:,
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ri vdylqj dq h{wud groodu iru rqh shulrg pxvw htxdo wkh pdujlqdo ehqhw1
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fdvh wkh exgjhw frqvwudlqw ehfrphv orjolqhdu1 Zh vroyh wkh prgho xqghu wklv
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68
Constant consumption-wealth ratio

Coefficient of Relative Risk Aversion (γ)
Myopic portfolio choice

Log utility
Power utility
ψ = 1
γ
1
Elasticity of Intertemporal Substitution (ψ)
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orj+, . +4 , orj+4 ,@1
75
Lw lv khosixo wr ghulyh d orqj0whup yhuvlrq ri wklv exgjhw frqvwudlqw1 Wr

gr wklv zh fdq xvh wkh wulyldo htxdolw|
z|n @ f|n . +f| z| , +f|n z|n ,= +618,
Htxdwlqj wkh ohiw0kdqg vlghv ri +617, dqg +618,/ zh rewdlq d glhuhqfh htxd0
wlrq lq wkh orj frqvxpswlrq0zhdowk udwlr1 Zh fdq vroyh iruzdug/ dvvxplqj
wkdw olp3<" +f|n z|n , @ 3 +d frqglwlrq wkdw zloo krog/ iru h{dpsoh/
li wkh frqvxpswlrq0zhdowk udwlr lv vwdwlrqdu|,/ wr jhw
"
[ n
f| z| @ +uRc|n f|n , . = +619,
4
'
Wklv htxdwlrq vd|v wkdw d kljk frqvxpswlrq0zhdowk udwlr wrgd| pxvw eh

iroorzhg hlwkhu e| kljk uhwxuqv rq lqyhvwhg zhdowk ru e| orz frqvxpswlrq
jurzwk1 Wkdw lv/ kljk frqvxpswlrq wrgd| zloo ghsohwh zhdowk dqg khqfh
ixwxuh frqvxpswlrq srvvlelolwlhv xqohvv lw lv rvhw e| kljk lqyhvwphqw uhwxuqv1
Wklv iroorzv vlpso| iurp wkh lqwhuwhpsrudo exgjhw frqvwudlqw> wkhuh lv qr
prgho ri rswlpdo ehkdylru lq +619,1
Htxdwlrq +619, krogv h{ srvw/ exw lw dovr krogv h{ dqwh> li rqh wdnhv
h{shfwdwlrqv ri +619, dw wlph w/ wkh ohiw0kdqg vlgh lv xqfkdqjhg/ dqg wkh
uljkw0kdqg vlgh ehfrphv dq h{shfwhg glvfrxqwhg ydoxh=
"
[ n
f| z| @ H| +uRc|n f|n , . = +61:,
4
'
Htxdwlrq +61:, fdq eh vxevwlwxwhg lqwr +617, dqg +618, wr rewdlq

"
[
f|n H| f|n @ +H|n H| , uRc|nn
'f
"
[
+H|n H| , f|nn = +61;,
'
Htxdwlrq +61;, vd|v wkdw dq xszdug vxusulvh lq frqvxpswlrq wrgd| pxvw

fruuhvsrqg wr dq xqh{shfwhg uhwxuq rq zhdowk wrgd| +wkh uvw whup lq wkh
uvw vxp rq wkh uljkw0kdqg vlgh ri wkh htxdwlrq,/ ru wr qhzv wkdw ixwxuh
uhwxuqv zloo eh kljkhu +wkh uhpdlqlqj whupv lq wkh uvw vxp,/ ru wr d grzq0
zdug uhylvlrq lq h{shfwhg ixwxuh frqvxpswlrq jurzwk +wkh vhfrqg vxp rq
wkh uljkw0kdqg vlgh/ zklfk vwduwv rqh shulrg dkhdg,1
76
Wkhvh irupxodv duh dqdorjrxv wr h{suhvvlrqv ghyhorshg e| Fdpsehoo dqg

Vkloohu +4<;;, dqg Fdpsehoo +4<<4, uhodwlqj glylghqgv/ vwrfn sulfhv/ dqg
vwrfn uhwxuqv1 Zhdowk fdq eh wkrxjkw ri dv dq dvvhw wkdw sd|v frqvxpswlrq
dv lwv glylghqg1 Wklv lqvljkw dssolhv erwk wr dq lqglylgxdo*v zhdowk dqg frq0
vxpswlrq/ dqg wr djjuhjdwh zhdowk dqg frqvxpswlrq> wkxv wkh dvvxpswlrq
frpprqo| pdgh lq hpslulfdo qdqfh uhvhdufk/ wkdw dq djjuhjdwh vwrfn lqgh{
lv d jrrg sur{| iru wkh pdunhw sruwirolr ri djjuhjdwh zhdowk/ lv htxlydohqw wr
wkh dvvxpswlrq ri Oxfdv +4<:;, dqg Phkud dqg Suhvfrww +4<;8, wkdw vwrfnv
duh sulfhg dv li wkh| sd| glylghqgv htxdo wr wkh djjuhjdwh frqvxpswlrq ri
wkh hfrqrp|1
2 5Mt|||?} L| UL?t4T|L?

Zh kdyh vkrzq wkdw wkh frqvxpswlrq0zhdowk udwlr fdq eh uhodwhg wr h{shfwhg
ixwxuh uhwxuqv dqg frqvxpswlrq jurzwk1 Wkh qh{w vwhs lv wr vxevwlwxwh
h{shfwhg frqvxpswlrq jurzwk rxw ri wkh prgho1 Iru wklv sxusrvh zh fdq
xvh wkh Hxohu htxdwlrq iru Hsvwhlq0]lq xwlolw| xqghu orjqrupdolw|/ +517:,=

H| ^f|n ` @ # orj . #H| uRc|n . Ydu| ^f|n #uRc|n `=
5#
Li frqvxpswlrq dqg wkh sruwirolr uhwxuq duh qrw rqo| orjqrupdo exw kr0
prvnhgdvwlf/ wkhq wkh yduldqfh whup lq +517:, lv frqvwdqw dqg zh fdq uhzulwh
dv
H| ^f|n ` @ . #H| uRc|n > +61<,
zkhuh wkh lqwhufhsw lqfoxghv qrw rqo| wkh sxuh udwh ri wlph suhihuhqfh exw
dovr wkh hhfwv ri ulvn rq frqvxpswlrq1
Vxevwlwxwlqj +61<, lqwr +61:,/ zh qg
"
[ +n ,
f| z| @ +4 #,H| uRc|n . = +6143,
4
'
Wkh orj frqvxpswlrq0zhdowk udwlr ghshqgv rq wkh h{shfwhg glvfrxqwhg ydoxh

ri doo ixwxuh sruwirolr uhwxuqv/ zlwk srvlwlyh vljq li # ? 4 dqg qhjdwlyh
vljq li # A 41 Wkhuh duh rssrvlqj lqfrph dqg vxevwlwxwlrq hhfwv ri dq
lqfuhdvhg sruwirolr uhwxuq1 Rq wkh rqh kdqg/ li wkh sruwirolr uhwxuq lv kljkhu/
frqvxpswlrq fdq eh kljkhu lq doo shulrgv iru dq| ydoxh ri zhdowk> wklv lv wkh
srvlwlyh lqfrph hhfw ri wkh sruwirolr uhwxuq rq frqvxpswlrq1 Rq wkh
rwkhu kdqg/ li wkh sruwirolr uhwxuq lv kljkhu/ wkhuh lv d juhdwhu lqfhqwlyh
wr ghod| frqvxpswlrq/ fxwwlqj frqvxpswlrq wrgd| lq rughu wr h{sorlw pruh
77
idyrudeoh lqyhvwphqw rssruwxqlwlhv> wklv lv wkh qhjdwlyh vxevwlwxwlrq hhfw ri

wkh sruwirolr uhwxuq rq frqvxpswlrq1 Wkh lqfrph hhfw grplqdwhv li # ? 4
dqg wkh vxevwlwxwlrq hhfw grplqdwhv li # A 41 Li # @ 4/ wkh wzr hhfwv
fdqfho dqg wkh frqvxpswlrq0zhdowk udwlr lv frqvwdqw dv suhylrxvo| qrwhg1
Htxdwlrq +6143, doorzv xv wr uhzulwh +61;, dv
"
[
f|n H| f|n @ uRc|n H| uRc|n . +4 #,+H|n H| , uRc|nn = +6144,
'
Wkh lqqrydwlrq lq frqvxpswlrq lv wkh vxusulvh frpsrqhqw ri wkh sruwirolr

uhwxuq/ zklfk kdv d rqh0iru0rqh hhfw ehfdxvh ri wkh vfdoh0lqghshqghqfh ri
wkh xwlolw| ixqfwlrq/ soxv +4 #, wlphv wkh uhylvlrq lq h{shfwdwlrqv ri ix0
wxuh uhwxuqv1 Li # ? 4/ d srvlwlyh vxusulvh derxw ixwxuh uhwxuqv lqfuhdvhv
frqvxpswlrq wrgd| wkurxjk wkh grplqdqw lqfrph hhfw> li # A 4/ d srvl0
wlyh vxusulvh derxw ixwxuh uhwxuqv uhgxfhv frqvxpswlrq wrgd| wkurxjk wkh
grplqdqw vxevwlwxwlrq hhfw1
Hduolhu zh dvvxphg wkdw frqvxpswlrq dqg dvvhw uhwxuqv duh mrlqwo| orj0
qrupdo dqg krprvnhgdvwlf1 Zh fdq qrz vhh zkdw lv uhtxluhg wr mxvwli|
wklv dvvxpswlrq1 Dffruglqj wr +6144,/ zh qhhg wkdw orj sruwirolr uhwxuqv
dqg uhylvlrqv lq h{shfwdwlrqv ri ixwxuh orj sruwirolr uhwxuqv duh qrupdo dqg
krprvnhgdvwlf/ dv wkh| zloo eh iru h{dpsoh lq d olqhdu wlph0vhulhv prgho iru
orj uhwxuqv dqg rwkhu vwdwh yduldeohv1
Uhfdoo wkdw xqghu Hsvwhlq0]lq xwlolw| zlwk d vlqjoh ulvn| dvvhw/ wkh suh0
plxp rq wkh ulvn| dvvhw ryhu wkh vdih dvvhw lv jlyhq e| +517;,=
2| Fry| +u|nc f|n ,

H| u|n usc|n . @ . +4 ,Fry| +u|nc uRc|n ,=
5 #
Dowkrxjk zh duh dvvxplqj wkdw frqglwlrqdo yduldqfhv dqg fryduldqfhv duh
frqvwdqw ryhu wlph/ zh uhwdlq wkhlu wlph vxevfulswv wr pdnh lw fohdu wkdw wkh|
duh fdofxodwhg frqglwlrqdo rq wlph w lqirupdwlrq1 Htxdwlrq +6144, lpsolhv
wkdw wkh fryduldqfh zlwk frqvxpswlrq wkdw dsshduv lq wklv h{suhvvlrq fdq
eh uhsodfhg e| wkh fryduldqfh zlwk wkh sruwirolr uhwxuq/ soxv +4 #, wlphv
wkh fryduldqfh zlwk uhylvhg h{shfwdwlrqv derxw ixwxuh uhwxuqv1 Xvlqj wkh
uhodwlrq ehwzhhq wkh sdudphwhuv / / dqg #/ zh qg wkdw
2|
H| u|n usc|n . @ Fry| +u|nc uRc|n , +6145,
5
"
[
.+ 4,Fry| +u|n > +H|n H| , uRc|nn ,=
'
78
Fdpsehoo +4<<6, ghulyhg wklv htxdwlrq/ dqg Fdpsehoo +4<<9, xvhg lw lq dq

dvvhw sulflqj frqwh{w/ dvnlqj zkhwkhu wkh FDSP/ dv h{whqghg e| wkh vhfrqg
whup rq wkh uljkw0kdqg vlgh ri +6145,/ frxog h{sodlq wkh sdwwhuq ri ulvn suhpld
lq XV qdqfldo pdunhwv1
Wklv dqdo|vlv vkrzv wkdw xqghu Hsvwhlq0]lq xwlolw|/ wkhuh lv dq hohjdqw
vhsdudwlrq ehwzhhq wkh hodvwlflw| ri lqwhuwhpsrudo vxevwlwxwlrq # dqg wkh
frhflhqw ri uhodwlyh ulvn dyhuvlrq 1 Jlyhq wkh orjolqhdul}dwlrq frhflhqw
/ rqo| wkh sdudphwhu # dsshduv lq htxdwlrqv +6143, dqg +6144, wkdw uhodwhv
frqvxpswlrq wr uhwxuqv/ dqg rqo| wkh sdudphwhu dsshduv lq wkh htxdwlrq
+6145, wkdw uhodwhv wkh ulvn suhplxp wr wkh vhfrqg prphqwv ri dvvhw uhwxuqv1
D fdyhdw lv wkdw lq jhqhudo wkh orjolqhdul}dwlrq sdudphwhu lwvhoi ghshqgv
rq erwk # dqg > krzhyhu zh vkdoo vhh wkdw wklv ghshqghqfh lv hpslulfdoo|
zhdn dqg grhv qrw vhulrxvo| xqghuplqh wkh vhsdudwlrq ri # dqg 1
TT*U@|L? |L TLh|uL*L ULUi

Vr idu zh kdyh dvvxphg rqo| wkdw frqvxpswlrq dqg wkh rswlpdo sruwirolr
duh mrlqwo| orjqrupdo zlwk frqvwdqw yduldqfhv1 Lq rughu wr dsso| +6145, lq d
prgho ri sruwirolr fkrlfh/ zh qhhg wr pdnh wkh ixuwkhu dvvxpswlrq wkdw wkh
dydlodeoh lqglylgxdo dvvhwv kdyh frqvwdqw yduldqfhv dqg ulvn suhpld1 Wklv
lpsolhv wkdw yduldwlrq lq wkh h{shfwhg sruwirolr uhwxuq lv hqwluho| gxh wr ydul0
dwlrq lq wkh ulvnohvv lqwhuhvw udwh/ vr wkh uhylvlrqv lq h{shfwhg ixwxuh sruwirolr
uhwxuqv lq +6145, duh htxlydohqw
S" wr uhylvlrqv lq h{shfwhg S"ixwxuh ulvnohvv lq0

whuhvw udwhv= +H|n H| , ' uRc|nn @ +H|n H| , ' usc|nn 1 Lw
dovr lpsolhv wkdw rswlpdo sruwirolr zhljkwv duh frqvwdqw/ uhfrqflolqj wkh dv0
vxpswlrqv ri frqvwdqw yduldqfhv iru erwk lqglylgxdo dvvhwv dqg wkh sruwirolr
uhwxuq1
Lq d prgho zlwk d vlqjoh ulvn| dvvhw/ zh kdyh Fry| +u|n > uRc|n , @ | 2| 1
Vxevwlwxwlqj lqwr +6145, dqg uhduudqjlqj/ zh qg wkdw wkh rswlpdo sruwirolr
zhljkw rq wkh ulvn| dvvhw lv d frqvwdqw jlyhq e|
4 H| u|n usc|n . 2| @5
@
2|
S"
4 Fry| +u|n > +H|n H| , ' usc|nn ,
. 4 = +6146,
2|
Wkh ghpdqg iru wkh ulvn| dvvhw lv d zhljkwhg dyhudjh ri wzr ghvludeoh dw0
wulexwhv1 Wkh uvw dwwulexwh lv wkh dvvhw*v ulvn suhplxp/ uhodwlyh wr lwv
yduldqfh/ dqg wkh vhfrqg/ lqwhuwhpsrudo dwwulexwh lv wkh dvvhw*v fryduldqfh
zlwk uhgxfwlrqv lq h{shfwhg ixwxuh lqwhuhvw udwhv/ djdlq uhodwlyh wr lwv ydul0
dqfh1 Wkh zhljkw rq wkh uvw dwwulexwh lv uhodwlyh ulvn wrohudqfh +4@,/
79
zklfk ehfrphv qhjoljleoh dv lqfuhdvhv> d kljko| frqvhuydwlyh lqyhvwru grhv

qrw ex| wkh ulvn| dvvhw iru lwv ulvn suhplxp1 Wkh zhljkw rq wkh vhfrqg
dwwulexwh lv 4 +4@,/ zklfk lv }hur iru d p|rslf lqyhvwru zlwk @ 4 exw
dssurdfkhv 4 dv lqfuhdvhv1 D kljko| frqvhuydwlyh lqyhvwru krogv wkh ulvn|
dvvhw rqo| li lw frydulhv zlwk ghfolqhv lq lqwhuhvw udwhv/ frpshqvdwlqj wkh
sruwirolr iru wkh uhgxfwlrq lq lqfrph wkdw rffxuv zkhq lqwhuhvw udwhv idoo1
D yduldqw ri +6146, zdv ghulyhg e| Uhvwr| +4<<5,1 Xvlqj +6143,/ Uhvwr|
qrwhg wkdw uhylvlrqv lq h{shfwhg ixwxuh sruwirolr uhwxuqv duh
S sursruwlrqdo wr
vxusulvhv lq wkh orj frqvxpswlrq0zhdowk udwlr/ +H|n H| , " ' u
Rc|nn @
+H|n H| ,+f|n z|n ,@+4 #,1 Khqfh zh fdq zulwh
4 H| u|n usc|n . 2| @5

@
2
|
4 4 Fry| +u|n > +f|n z|n ,,
. 4 = +6147,
4# 2|
Wklv htxdwlrq vkrzv wkdw wkh lqwhuwhpsrudo frpsrqhqw ri dvvhw ghpdqg
zrunv wkurxjk fryduldqfh ri wkh ulvn| dvvhw zlwk wkh frqvxpswlrq0zhdowk
udwlr1 Krzhyhu lw fdq eh plvohdglqj ehfdxvh lw vxjjhvwv wkdw wkh sdudphwhu
# sod|v d uroh lq dvvhw ghpdqg zkhuhdv lq idfw # fdqfhov rxw ri wkh suhylrxv
htxdwlrq1
D wklug wudqvirupdwlrq ri +6146, xvhv wkh Hsvwhlq0]lq uhvxow +5183, uh0
odwlqj wkh ydoxh ixqfwlrq shu xqlw zhdowk wr wkh frqvxpswlrq0zhdowk udwlr1
Wdnlqj orjv ri +5183,/ wkh vhfrqg whup lq +6147, fdq eh uhvwdwhg lq whupv ri
wkh fryduldqfh ri wkh ulvn| dvvhw uhwxuq zlwk wkh ydoxh ixqfwlrq/
4 H| u|n usc|n . 2| @5
@
2
|
4 Fry| +u|n > y|n ,
. 4 = +6148,
2|
Wklv vkrzv wkdw wkh lqwhuwhpsrudo frpsrqhqw ri dvvhw ghpdqg lv ghwhuplqhg
e| wkh fryduldqfh ri wkh ulvn| dvvhw uhwxuq zlwk wkh lqyhvwru*v xwlolw| shu xqlw
zhdowk/ zklfk ydulhv ryhu wlph zlwk lqyhvwphqw rssruwxqlwlhv1
Rqh fdq xvh wkhvh wkuhh htxdwlrqv wr xqghuvwdqg wkh lqwhoohfwxdo klvwru|
ri uhvhdufk rq orqj0whup sruwirolr fkrlfh1 Phuwrq +4<:4/ 4<:6, lqwurgxfhg
wkh frqfhsw ri lqwhuwhpsrudo khgjlqj ghpdqg iru ulvn| dvvhwv1 Kh zrunhg
zlwk wkh lqgluhfw xwlolw| ru ydoxh ixqfwlrq ghqhg ryhu zhdowk dqg vwdwh ydul0
deohv> wkxv klv dssurdfk zdv vlplodu lq vslulw wr +6148,1 Euhhghq +4<:<,
uvw xvhg fryduldqfh zlwk frqvxpswlrq dv d phdvxuh ri ulvn iru d orqj0whup
lqyhvwru> wkxv klv dssurdfk zdv forvh wr +6147,1 Qhlwkhu dxwkru ghulyhg
7:
dq h{solflw vroxwlrq frpsdudeoh wr +6146,/ uhodwlqj sruwirolr ghpdqgv wr fr0

yduldqfhv ri dvvhwv zlwk h{rjhqrxv yduldeohv1 Htxdwlrq +6146, ghshqgv rq
vshflf dvvxpswlrqv/ exw lw fdq eh xvhg wr rewdlq jhqhudo lqvljkwv1 Qrwh
lq sduwlfxodu wkdw lqwhuwhpsrudo khgjlqj ghpdqg lq +6146, ghshqgv rq wkh
glvfrxqwhg suhvhqw ydoxh ri doo ixwxuh lqwhuhvw udwhv> wkxv sruwirolr fkrlfh ri
orqj0whup lqyhvwruv lv dhfwhg idu pruh vwurqjo| e| shuvlvwhqw yduldwlrqv lq
lqyhvwphqw rssruwxqlwlhv wkdq e| wudqvlwru| yduldwlrqv1
e `@| t |i ht!*itt @tti|q

Wkh lghqwlw| ri wkh ulvnohvv dvvhw lv d ixqgdphqwdo lvvxh lq qdqfh1 Lw lv
frqyhqwlrqdo wr wklqn ri wkh ulvnohvv dvvhw dv dq dvvhw wkdw kdv d vwdeoh fdslwdo
ydoxh lq wkh vkruw whup/ vxfk dv d Wuhdvxu| eloo ru prqh| pdunhw ixqg1 Vxfk
dq dvvhw kdv d nqrzq uhwxuq ryhu rqh shulrg/ dqg zloo eh khog e| dq lqqlwho|
frqvhuydwlyh vkruw0whup lqyhvwru1
Iru d orqj0whup lqyhvwru/ krzhyhu/ d vwudwhj| ri uroolqj ryhu Wuhdvxu|
eloov lv qrw qhfhvvdulo| vdih ehfdxvh pdwxulqj eloov pxvw eh uhlqyhvwhg dw
xqnqrzq ixwxuh uhdo lqwhuhvw udwhv1 Ryhu wkluw| |hduv djr Prgljoldql dqg
Vxwfk +4<99, pdgh lv srlqw sduwlfxoduo| fohduo|/ zulwlqj
Vxssrvh d shuvrq kdv dq q shulrg kdelwdw> wkdw lv/ kh kdv

ixqgv zklfk kh zloo qrw qhhg iru q shulrgv dqg zklfk/ wkhuhiruh/
kh lqwhqgv wr nhhs lqyhvwhg lq erqgv iru q shulrgv1 Li kh lqyhvwv
lq q shulrg erqgv/ kh zloo nqrz h{dfwo| wkh rxwfrph ri klv lq0
yhvwphqwv dv phdvxuhg e| wkh whuplqdo ydoxh ri klv zhdowk1111 Li/
krzhyhu/ kh vwd|v vkruw/ klv rxwfrph lv xqfhuwdlq1111 Wkxv/ li kh
kdv ulvn dyhuvlrq/ kh zloo suhihu wr vwd| orqj +ss1 4;6~4;7,1
Prgljoldql dqg Vxwfk*v dvvxpswlrq/ wkdw dq lqyhvwru fduhv derxw rqo|

derxw zhdowk dw d vlqjoh ixwxuh gdwh/ lv vrphzkdw duwlfldo1 Krzhyhu d
vlplodu lqvljkw dssolhv wr d orqj0whup lqyhvwru ri wkh vruw prghoohg lq wklv
errn/ zkr fduhv derxw wkh vwuhdp ri frqvxpswlrq ru vwdqgdug ri olylqj wkdw
fdq eh vxssruwhg e| zhdowk1 Wklv srlqw zdv uvw pdgh e| Vwljolw} +4<:3,
dqg Uxelqvwhlq +4<:9e,1
Wr vkrz wkh uhvxow lq wkh frqwh{w ri rxu prgho/ zh frqvlghu zkdw kdsshqv
wr sruwirolr fkrlfh dv wkh frhflhqw ri uhodwlyh ulvn dyhuvlrq lqfuhdvhv1 Lq
wklv fdvh uhodwlyh ulvn wrohudqfh +4@, jrhv wr }hur vr +6146, dssurdfkhv
S
Fry| +u|n > +H|n H| , "
' usc|nn ,
| @ = +6149,
2|
7;
Qrz frqvlghu wkh sulflqj ri dq lqdwlrq0lqgh{hg shushwxlw| ru frqvro/

wkdw sd|v rqh xqlw ri frqvxpswlrq hdfk shulrg iruhyhu1 Fdpsehoo/ Or dqg
PdfNlqod| +4<<:/ s1 73;,/ iroorzlqj Vkloohu +4<:<,/ vkrz wkdw d orj0olqhdu
dssur{lpdwlrq wr wkh orj |lhog |Sc| rq d uhdo frqvro lv
"
[
|S| @ S . +4 S ,H| S usc|nn = +614:,
'f
Khuh S lv d frqvwdqw wkdw fdswxuhv dq| ulvn suhplxp rq wkh frqvro/ dqg S
lv d orj0olqhdul}dwlrq sdudphwhu ghqhg dv S 4h{siH+sSc| ,j/ zkhuh sSc|
lv wkh orj _fxp0glylghqg% sulfh ri wkh frqvro lqfoxglqj lwv fxuuhqw frxsrq1
Dovr/ wkh frqvro uhwxuq lv jlyhq e|
4 S
uSc|n @ |S| |Sc|n
4 S 4 S
"
[
@ usc|n . S +H|n H| , S usc|nn = +614;,
'
Wkxv wkh frqvro uhwxuq kdv wkh surshuw| wkdw lwv yduldqfh 2| htxdov wkh
qhjdwlyh ri lwv fryduldqfh zlwk uhylvlrqv lq h{shfwhg ixwxuh lqwhuhvw udwhv1
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Wkh VGI ghwhuplqhv wkh sulfhv ri doo dvvhwv lq wkh hfrqrp|/ exw wkh olqn lv
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wr lwv frqglwlrqdo h{shfwdwlrq=
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Wkh whup vwuxfwxuh ri uhdo lqwhuhvw udwhv
Wkh hfrqrplf phdqlqj ri wkhvh dvvxpswlrqv fdq ehvw eh dssuhfldwhg

e| zrunlqj rxw wkhlu lpsolfdwlrqv iru wkh whup vwuxfwxuh ri uhdo lqwhuhvw
udwhv1 Wkhuh lv d gluhfw olqn ehwzhhq wkh vwrfkdvwlf glvfrxqw idfwru dqg
85
wkh orj uhwxuq/ ru htxlydohqwo| wkh orj |lhog/ rq d rqh0shulrg lqgh{hg erqg=
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uc|n @ {| 6% % . 26 > +6158,
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dq DU+4, surfhvv zlwk shuvlvwhqfh !1
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zloo eh ghvfulehg e| +6158,1 Wkxv rqh fdq vroyh iru lwv orj sulfh/ ru htxlyd0
ohqwo| lwv orj |lhog/ dqg wkhq wkh orj sulfhv dqg |lhogv ri doo orqjhu0pdwxulw|
erqgv1 Wkh vroxwlrq iru wkh orj |lhog rq dq q0shulrg lqgh{hg }hur0frxsrq
erqg/ |?| / wlphv erqg pdwxulw| q/ zklfk htxdov plqxv wkh orj sulfh ri wkh
erqg/ s?| / lv jlyhq e|
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4 !?%
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whup vwuxfwxuh krogv lq wklv prgho1 Wkxv wkh orj erqg |lhog lv d frqvwdqw
soxv dq dyhudjh ri h{shfwhg ixwxuh uhdo lqwhuhvw udwhv ryhu wkh qh{w q shulrgv/
dqg q wlphv wkh orj erqg |lhog lv d frqvwdqw soxv d vxp ri h{shfwhg ixwxuh
uhdo lqwhuhvw udwhv1 Vlqfh wkh uhdo lqwhuhvw udwh iroorzv dq DU+4, surfhvv zlwk
shuvlvwhqfh frhflhqw !% / wkh h{shfwhg uhdo lqwhuhvw udwh n shulrgv dkhdg lv
d frqvwdqw soxv !&% wlphv wkh uhdo lqwhuhvw udwh wrgd|1 Vxpplqj xs ryhu q
shulrgv jlyhv +615:,1
Wkh rqh0shulrg orj uhwxuq rq dq q0shulrg lqgh{hg }hur0frxsrq erqg lv
mxvw wkh fkdqjh lq lwv sulfh/ +s?3c|n s?c| ,1 Frpelqlqj wklv h{suhvvlrq zlwk
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4 2
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5
vr wkh q0shulrg erqg lv vhqvlwlyh rqo| wr uhdo0lqwhuhvw0udwh vkrfnv %%c|n /
zlwk d vhqvlwlylw| E?3 1 Ehfdxvh wkh uhdo sduw ri rxu prgho kdv rqo| d
86
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duh gulyhq rqo| e| wkh vkruw0whup uhdo lqwhuhvw udwh dqg wkxv duh shuihfwo|
fruuhodwhg zlwk rqh dqrwkhu1 Wkh yduldqfh ri wkh q0shulrg erqg uhwxuq lv
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rxu krprvnhgdvwlf prgho wkh frqglwlrqdo fryduldqfh lv frqvwdqw wkurxjk wlph
exw ghshqghqw rq wkh erqg pdwxulw|> wkxv wkh whup suhplxp lv frqvwdqw
dv srvwxodwhg e| wkh h{shfwdwlrqv k|srwkhvlv ri wkh whup vwuxfwxuh1 Vlqfh
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6% / orqj0whup lqgh{hg erqgv sd| r zkhq wkh VGI ru/ htxlydohqwo|/ wkh
pdujlqdo xwlolw| ri frqvxpswlrq iru d uhsuhvhqwdwlyh lqyhvwru lv kljk/ wkdw lv/
zkhq zhdowk lv prvw ghvludeoh1 Lq htxloleulxp/ wkhvh erqgv kdyh d qhjdwlyh
whup suhplxp dqg wkh uhdo |lhog fxuyh lv rq dyhudjh grzqzdug0vorslqj1
Zlwk d qhjdwlyh 6% / rq wkh rwkhu kdqg/ orqj0whup lqgh{hg erqgv sd| r
zkhq wkh pdujlqdo xwlolw| ri frqvxpswlrq iru d uhsuhvhqwdwlyh lqyhvwru lv
orz/ dqg vr lq htxloleulxp wkh| kdyh d srvlwlyh whup suhplxp1 Lq wklv fdvh
wkh uhdo |lhog fxuyh lv rq dyhudjh xszdug0vorslqj1
Htxdwlrq +615<, lpsolhv wkdw wkh Vkdush udwlr iru lqgh{hg erqgv lv 6% % /
zklfk lv lqghshqghqw ri erqg pdwxulw|1 Wkh lqyduldqfh ri wkh Vkdush udwlr
wr erqg pdwxulw| iroorzv iurp wkh vlqjoh0idfwru vwuxfwxuh ri wkh uhdo vhfwru
ri wkh prgho1 Wkh udwlr ri wkh ulvn suhplxp wr wkh yduldqfh ri wkh h{fhvv
uhwxuq/ zklfk ghwhuplqhv d p|rslf lqyhvwru*v doorfdwlrq wr orqj0whup erqgv/
lv 6% @E?3 1 Wklv grhv ghshqg rq erqg pdwxulw| exw qrw rq wkh yrodwlolw|
ri wkh uhdo lqwhuhvw udwh1
Wkh rswlpdo sruwirolr ri lqdwlrq0lqgh{hg erqgv
Li rqo| lqdwlrq0lqgh{hg erqgv duh dydlodeoh wr wkh lqyhvwru/ wkh uhdo

vhfwru ri wkh prgho lv doo zh qhhg wr ghulyh dq h{solflw vroxwlrq wr wkh sruw0
irolr sureohp1 Ehfdxvh doo orqj0whup lqdwlrq0lqgh{hg erqgv duh shuihfwo|
fruuhodwhg/ zh fdq frqvlghu zlwkrxw orvv ri jhqhudolw| wkh fkrlfh ehwzhhq
wzr dvvhwv= d vlqjoh0shulrg lqdwlrq0lqgh{hg erqg dqg dq q0shulrg lqdwlrq0
lqgh{hg erqg1 Xvlqj +615;, wr fdofxodwh wkh whupv lq +6146,/ zh qg wkdw
wkh rswlpdo sruwirolr zhljkw rq wkh q0shulrg erqg lv

4 6% 4 4
? @ . 4 = +6163,
E?3 E?3 4 !%
87
Wklv vroxwlrq kdv vhyhudo lqwhuhvwlqj surshuwlhv1 Iluvw/ wkh yduldqfh ri

uhdo lqwhuhvw udwh vkrfnv/ 2% / grhv qrw gluhfwo| dhfw wkh sruwirolr zhljkw ?
ehfdxvh/ jlyhq wkh sdudphwhul}dwlrq ri rxu prgho/ lw pryhv wkh yduldqfh ri
uhwxuqv dqg wkh ulvn suhplxp lq sursruwlrq wr rqh dqrwkhu1 Lqwhuhvw0udwh
yduldqfh fdq rqo| dhfw wkh vroxwlrq lqgluhfwo|/ wkurxjk wkh orjolqhdul}d0
wlrq sdudphwhu 1 Hpslulfdoo| zh qg wkdw fkdqjhv yhu| olwwoh zkhq
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erqgv/ wrjhwkhu zlwk wkh prphqwv lpsolhg e| rxu hvwlpdwhg prgho> sdqho E
vkrzv frpsdudeoh lpsolhg prphqwv iru lqgh{hg erqgv/ dqg sdqho F uhsruwv
vdpsoh dqg lpsolhg prphqwv iru htxlwlhv1 Urz 4 ri wkh wdeoh jlyhv Mhqvhq*v0
Lqhtxdolw|0fruuhfwhg dyhudjh h{fhvv uhwxuqv rq q0shulrg qrplqdo erqgv ryhu
40shulrg qrplqdo erqgv/ zkloh urz 5 jlyhv wkh vwdqgdug ghyldwlrqv ri wkhvh
h{fhvv uhwxuqv1 Urz 6 uhsruwv dqqxdol}hg Vkdush udwlrv iru qrplqdo erqgv/
wkh udwlr ri urz 4 wr urz 51 Urz 7 uhsruwv phdq qrplqdo |lhog vsuhdgv
dqg urz 8 uhsruwv wkh vwdqgdug ghyldwlrqv ri qrplqdo |lhog vsuhdgv1 Urzv 9
wkurxjk 43 uhshdw wkhvh prphqwv iru lqgh{hg erqgv1 Qrwh wkdw wkh uhsruwhg
ulvn suhpld dqg Vkdush udwlrv iru qrplqdo dqg lqgh{hg erqgv duh qrw gl0
uhfwo| frpsdudeoh ehfdxvh wkh| duh phdvxuhg uhodwlyh wr glhuhqw vkruw0whup
dvvhwv/ qrplqdo dqg lqgh{hg uhvshfwlyho|1
Wkh uvw wzr froxpqv ri Wdeoh 615 uhsruw uhvxowv iru wkh 4<850<< vdpsoh1
D frpsdulvrq ri wkh prgho lpsolfdwlrqv lq urzv 4 dqg 9 vkrzv wkdw 430|hdu
qrplqdo erqgv kdyh d ulvn suhplxp ryhu wkuhh0prqwk qrplqdo eloov ri 41:4(
shu |hdu/ zkloh 430|hdu lqgh{hg erqgv kdyh d ulvn suhplxp ryhu wkuhh0prqwk
lqgh{hg eloov ri 4154( shu |hdu1 Wkhvh qxpehuv/ wrjhwkhu zlwk wkh 670edvlv0
srlqw ulvn suhplxp rq wkuhh0prqwk qrplqdo eloov ryhu wkuhh0prqwk lqgh{hg
eloov/ lpso| d 430|hdu lqdwlrq ulvn suhplxp +wkh ulvn suhplxp rq 430|hdu
qrplqdo erqgv ryhu 430|hdu lqgh{hg erqgv, ri ;7 edvlv srlqwv1 Wklv qxpehu
lv voljkwo| orzhu wkdq wkh urxjk hvwlpdwh lq Fdpsehoo dqg Vkloohu +4<<9,1
Urzv 5 dqg : vkrz wkdw qrplqdo erqgv duh pxfk pruh yrodwloh wkdq
94
Wdeoh 615= Vdpsoh dqg Lpsolhg Prphqwv ri wkh Whup Vwuxfwxuh
Prphqw 4<851L 0 4<<<1LL 4<;61L 0 4<<<1LL
4 |u1 43 |u1 4 |u1 43 |u1
D= Qrplqdo Whup Vwuxfwxuh

m m
+4, Hû?c|n uc|n ` . 2m
? @5 vdpsoh 31736 41577 319:6 81;4;
lpsolhg 317;8 41:38 31443 419<:
m m
+5, +u?c|n uc|n , vdpsoh 418:6 441553 4138< 441<88
lpsolhg 418<< 44177: 41533 471693
+6, VUm @ +4,@+5, vdpsoh 31589 31444 31968 317;:
lpsolhg 31637 3147< 313<5 3144;
m m
+7, H^|?c|n |c|n ` vdpsoh 31766 41489 317:5 41;6;
lpsolhg 31589 31<<3 31384 317;;
m m
+8, +|?c|n |c|n , vdpsoh 3154; 31934 314:: 3189<
lpsolhg 314:: 31;36 31459 319<8
E= Uhdo Whup Vwuxfwxuh
+9, Hû?c|n uc|n ` . 2? @5 lpsolhg 3174< 41546 3149; 41;94
+:, +u?c|n uc|n , lpsolhg 415:5 619;9 41743 481954
+;, VU @ +9,@+:, lpsolhg 3165< 3165< 3144< 3144<
+<, H^|?c|n |c|n ` lpsolhg 31549 31<6: 313;3 3186:
+43, +|?c|n |c|n , lpsolhg 314:9 31:<6 3137; 3188<
F= Htxlwlhv
m
+44, Hûec|n +uc|n |n ,` vdpsoh :19:4 431947
2 m
. +uec|n +uc|n |n ,,@5 lpsolhg <1<44 ;1;:<
m
+45, +uec|n +uc|n |n ,, vdpsoh 491367 48147:
lpsolhg 49179; 48157<
+46, VU @ +44,@+45, vdpsoh 317:; 31:34
lpsolhg 31935 318;5
95
lqgh{hg erqgv> wkh glhuhqfh lq yrodwlolw| lqfuhdvhv zlwk pdwxulw|/ vr wkdw 430
|hdu qrplqdo erqgv kdyh d vwdqgdug ghyldwlrq wkuhh wlphv juhdwhu wkdq 430
|hdu lqgh{hg erqgv1 Wklv glhuhqfh lq yrodwlolw| pdnhv wkh Vkdush udwlr iru
lqgh{hg erqgv lq urz ; frqvlghudeo| kljkhu wkdq wkh Vkdush udwlr iru qrplqdo
erqgv lq urz 61 Vlqfh lqgh{hg erqg uhwxuqv duh jhqhudwhg e| d vlqjoh0idfwru
prgho/ wkh Vkdush udwlr iru lqgh{hg erqgv lv lqghshqghqw ri pdwxulw| dw
31661 Wkh Vkdush udwlr iru qrplqdo erqgv ghfolqhv zlwk pdwxulw|> vkruw0
whup qrplqdo erqgv kdyh d udwlr forvh wr wkdw iru lqgh{hg erqgv/ exw wkh
Vkdush udwlr iru 430|hdu qrplqdo erqgv lv rqo| 31481 Wkhvh qxpehuv lpso|
wkdw lq rxu sruwirolr dqdo|vlv/ lqyhvwruv zlwk orz ulvn dyhuvlrq zloo kdyh d
vwurqj p|rslf ghpdqg iru lqgh{hg erqgv1
Wdeoh 615 fdq dovr eh xvhg wr hydoxdwh wkh hpslulfdo w ri wkh prgho1 D
frpsdulvrq ri wkh prgho*v lpsolhg prphqwv zlwk wkh vdpsoh prphqwv iru
qrplqdo erqgv vkrzv wkdw wkh prgho wv wkh yrodwlolw| ri h{fhvv qrplqdo
erqg uhwxuqv h{wuhpho| zhoo1 Wkh prgho vrphzkdw ryhuvwdwhv wkh dyhudjh
h{fhvv qrplqdo erqg uhwxuq dqg wkh qrplqdo Vkdush udwlr/ exw wklv fdq eh
dwwulexwhg lq sduw wr wkh xszdug guliw lq lqwhuhvw udwhv ryhu wkh 4<850<<
vdpsoh shulrg zklfk eldvhv grzqzdug wkh vdpsoh phdqv12
Dqrwkhu zd| wr mxgjh wkh w ri wkh prgho lv wr dvn krz pxfk ri wkh
yduldelolw| ri erqg |lhogv/ ru erqg uhwxuqv/ lv dffrxqwhg iru e| wkh vwuxf0
wxudo sdudphwhuv dv rssrvhg wr wkh zklwh0qrlvh phdvxuhphqw huuruv zh kdyh
doorzhg lq hdfk erqg |lhog1 Wkh hvwlpdwhg yduldqfhv ri phdvxuhphqw huuruv
+qrw uhsruwhg lq Wdeoh 614, duh }hur iru 40|hdu dqg 430|hdu erqgv dqg duh
h{wuhpho| vpdoo iru 60prqwk eloov dqg 60|hdu erqgv1 Phdvxuhphqw huuruv duh
hvwlpdwhg wr dffrxqw iru ohvv wkdq 318 shufhqw ri wkh yduldqfh ri 60prqwk
dqg 60|hdu erqg |lhogv dqg ohvv wkdq 8 shufhqw ri wkh yduldqfh ri 60|hdu
erqg uhwxuqv1 Wklv uhhfwv wkh idfw wkdw erqg |lhogv duh kljko| shuvlvwhqw
dw doo pdwxulwlhv/ vr wkh prgho wv wkhp sulpdulo| zlwk shuvlvwhqw vwuxfwxudo
surfhvvhv udwkhu wkdq zklwh0qrlvh phdvxuhphqw huuruv1
Ilqdoo|/ zh fdq xvh wkh prgho wr ghvfuleh wkh klvwru| ri wkh qrplqdo XV
whup vwuxfwxuh dqg lwv frpsrqhqwv1 Zh gr wklv lq Iljxuh 614/ zklfk vkrzv
60prqwk qrplqdo eloo |lhogv/ uhdo |lhogv dqg h{shfwhg lqdwlrq lq wkh wrs
sdqho/ dqg wkh htxlydohqw 430|hdu vhulhv lq wkh erwwrp sdqho1 Wkh prgho
dwwulexwhv wkh orz0iuhtxhqf| yduldwlrq ri qrplqdo lqwhuhvw udwhv/ sduwlfxoduo|
wkh uxqxs lq qrplqdo udwhv iurp wkh 4<93*v wkurxjk wkh hduo| 4<;3*v dqg
wkh vorz ghfolqh wkhuhdiwhu/ wr fkdqjlqj h{shfwhg lqdwlrq1 Pxfk ri wkh
2
AL t@i tT@Uic t|@?_@h_ ihhLht @hi ?L| hiTLh|i_ ? |i |@M*i Ai }i?ih@* T@||ih? t
L?i Lu t4@** t|@?_@h_ ihhLht uLh 4T*i_ L*@|*|itc @?_ 4U *@h}ih t|@?_@h_ ihhLht uLh
4T*i_ 4i@? i Uitt hi|h?t At hiiU|t |i i**!?L? hit*| |@| | t 4U @h_ih |L
LM|@? ThiUti it|4@|it Lu ht| 4L4i?|t |@? Lu tiUL?_ 4L4i?|t
96
kljkhu0iuhtxhqf| yduldwlrq lq lqwhuhvw udwhv lv dwwulexwhg wr wkh uhdo lqwhuhvw

udwh/ sduwlfxoduo| diwhu wkh hqg ri wkh 4<93*v1 Ehfdxvh uhdo0lqwhuhvw0udwh
yduldwlrq lv ohvv shuvlvwhqw wkdq h{shfwhg0lqdwlrq yduldwlrq/ wkh odwwhu lv
wkh pdlq ghwhuplqdqw ri wkh 430|hdu qrplqdo |lhog1 Krzhyhu wkh 430|hdu
uhdo |lhog grhv vkrz vrph uhvlgxdo yduldwlrq1 Ryhudoo wkh prgho dsshduv
wr surylgh d jrrg ghvfulswlrq ri wkh qrplqdo XV whup vwuxfwxuh frqvlghulqj
lwv sduvlprq| dqg wkh idfw wkdw zh kdyh irufhg lw wr w erwk wlph0vhulhv dqg
furvv0vhfwlrqdo ihdwxuhv ri wkh gdwd1
Urzv 44/ 45/ dqg 46 ri Wdeoh 615 uhsruw vxppdu| vwdwlvwlfv iru htxlwlhv=
wkh dqqxdol}hg Mhqvhq*v0Lqhtxdolw|0fruuhfwhg dyhudjh h{fhvv uhwxuqv rq htxl0
wlhv uhodwlyh wr qrplqdo eloov/ wkh vwdqgdug ghyldwlrq ri wkhvh h{fhvv uhwxuqv/
dqg wkhlu Vkdush udwlr1 Wkh prgho wv wkh vwdqgdug ghyldwlrq ri htxlwlhv
h{wuhpho| zhoo exw ryhusuhglfwv wkh htxlw| suhplxp dqg wkh Vkdush udwlr
iru htxlwlhv1 Wkh lpsolhg Vkdush udwlr ri 3193 lpsolhv wkdw lqyhvwruv zlwk
orz ulvn dyhuvlrq zloo kdyh dq h{wuhpho| odujh p|rslf ghpdqg iru htxlwlhv>
wklv lv djdlq d pdqlihvwdwlrq ri wkh htxlw| suhplxp sx}}oh1
Wkh uljkw kdqg vlghv ri Wdeohv 4 dqg 5 uhshdw wkhvh hvwlpdwhv iru wkh
Yrofnhu0Juhhqvsdq shulrg 4<;6~<<1 Pdq| ri wkh sdudphwhu hvwlpdwhv duh
txlwh vlplodu> krzhyhu zh qg wkdw lq wklv shulrg uhdo lqwhuhvw udwhv duh pxfk
pruh shuvlvwhqw/ zlwk !% @ 3=<<4 dqg dq lpsolhg kdoi0olih iru uhdo lqwhuhvw
udwh vkrfnv ri derxw 4< |hduv1 Wkh h{shfwhg lqdwlrq surfhvv qrz phdq0
uhyhuwv pxfk pruh udslgo|/ zlwk !5 @ 3=;9: lpso|lqj d kdoi0olih iru h{shfwhg
lqdwlrq vkrfnv ri derxw 8 txduwhuv1 Wkhvh uhvxowv duh frqvlvwhqw zlwk wkh
sdwwhuqv looxvwudwhg lq Iljxuh 614/ dqg zlwk wkh qrwlrq wkdw vlqfh wkh hduo|
4<;3*v wkh Ihghudo Uhvhuyh kdv pruh djjuhvvlyho| frqwuroohg lqdwlrq dw wkh
frvw ri juhdwhu orqj0whup yduldwlrq lq wkh uhdo lqwhuhvw udwh +Fodulgd/ Jdol/
dqg Jhuwohu 4<<;,1 Wkh lqfuhdvh lq uhdo0lqwhuhvw0udwh shuvlvwhqfh lqfuhdvhv
wkh ulvn suhpld rq lqgh{hg dqg qrplqdo erqgv/ exw lw dovr juhdwo| lqfuhdvhv
wkh yrodwlolw| ri lqgh{hg erqg uhwxuqv vr wkh Vkdush udwlr iru lqgh{hg erqgv
lv orzhu dw 31451 Lq wkh uhpdlqghu ri wkh fkdswhu zh suhvhqw sruwirolr fkrlfh
uhvxowv edvhg rq rxu ixoo0vdpsoh hvwlpdwhv iru wkh shulrg 4<85~<</ exw zh dovr
glvfxvv uhvxowv iru wkh 4<;6~<< shulrg zkhuh wkh| duh lpsruwdqwo| glhuhqw1

6@4@ Eb.D u@4Lt*) @h}i_ |@| |i hi@* ?|ihit| h@|i t UL?t|@?| @?_ |@| @** @h
@|L? ? ?L4?@* ?|ihit| h@|it t _i |L i TiU|i_ ?@|L? At @t @ hi@tL?@M*i i
Lu t _@|@c U i?_i_ ? b.c M| Uih|@?*) _Lit ?L| _itUhMi 4Lhi hiUi?| i Tihi?Ui
ih@Tt 6@4@ ui** uL* Lu RhT)<t w@ Lu ,4ThU@* ,UL?L4Utc |@| @?) t|hL?} U@h
@U|iht|U Lu t|LhU@* _@|@ ** @*|ih 44i_@|i*) @u|ih | @t Mii? _i?|i_ M) i4ThU@*
iUL?L4t|t-
97
Iljxuh 614= Ilwwhg uhdo dqg qrplqdo |lhogv dqg lqdwlrq
98
Wdeoh 616= Rswlpdo Doorfdwlrqv wr Htxlwlhv dqg Orqj0Whup Erqgv
Xqfrqvwudlqhg Frqvwudlqhg Xqfrqvwudlqhg Frqvwudlqhg
U1U1D1 Htxlw| Lqgh{hg Htxlw| Lqgh{hg Htxlw| Qrplqdo Htxlw| Qrplqdo
+D, Vdpsoh Shulrg= 4<85 0 4<<<

31:8 797 <6: 433 3 7<8 047 433 3
4 67; :59 433 3 6:4 0; 433 3
5 4:7 743 433 3 4;7 4 433 3
8 :3 553 98 68 :6 9 :6 9
43 68 48: 65 9; 68 ; 68 ;
8333 3 <7 3 <7 05 43 3 43
+E, Vdpsoh Shulrg= 4<;6 0 4<<<

31:8 859 096 433 3 858 099 433 3
4 6<8 057 433 3 6<7 058 433 3
5 4<: 68 ;9 47 4<: 69 ;: 46
8 :< :3 6; 95 :< :6 69 97
43 6< ;5 55 :; 73 ;9 4< ;4
8333 3 <3 3 <6 4 <; 4 <;
2 W4T*U@|L?t uLh TLh|uL*L ULUi

Jlyhq rxu hvwlpdwhv ri wkh whup vwuxfwxuh prgho/ lw lv vwudljkwiruzdug wr
fdofxodwh doo wkh whupv lq wkh lqwhuwhpsrudo sruwirolr vroxwlrq +6154,1 Wd0
eoh 616 uhsruwv rswlpdo ghpdqgv iru htxlwlhv dqg iru 60prqwk dqg 430|hdu
lqgh{hg ru qrplqdo erqgv e| lqyhvwruv zkr duh xqfrqvwudlqhg ru vxemhfw wr
eruurzlqj dqg vkruw0vdohv frqvwudlqwv1 Iru vlpsolflw| zh dvvxph hlwkhu wkdw
vkruw0 dqg orqj0whup erqgv duh doo lqgh{hg/ ru wkdw wkh| duh doo qrplqdo> zh
gr qrw doorz lqyhvwruv wr krog htxlwlhv/ lqgh{hg erqgv/ dqg qrplqdo erqgv
vlpxowdqhrxvo|1 Sdqho D uhsruwv uhvxowv iru wkh 4<85~<< vdpsoh/ zklfk zh
frqvlghu uvw1
99
Lq d zruog zlwk ixoo lqgh{dwlrq/ wkh xqfrqvwudlqhg ghpdqg iru erwk orqj0
whup lqgh{hg erqgv dqg htxlwlhv lv srvlwlyh dqg riwhq deryh 433(/ lpso|lqj
wkdw wkh lqyhvwru rswlpdoo| eruurzv wr qdqfh sxufkdvhv ri htxlwlhv dqg
lqgh{hg erqgv1 Wkh sruwirolr vkduh ri lqgh{hg erqgv h{fhhgv wkdw ri htxlwlhv/
ghvslwh wkh kljkhu Vkdush udwlr ri htxlwlhv/ ehfdxvh lqgh{hg erqgv duh pxfk
ohvv ulvn| wkdq htxlwlhv1e Dv wkh frhflhqw ri uhodwlyh ulvn dyhuvlrq lqfuhdvhv/
wkh ghpdqgv iru erwk orqj0whup lqgh{hg erqgv dqg htxlwlhv idoo/ exw wkh
vkduh ri htxlwlhv idoov idvwhu1 Lq wkh olplw wkh lqqlwho| ulvn0dyhuvh lqyhvwru
krogv d sruwirolr htxlydohqw wr dq lqgh{hg shushwxlw| dv zh kdyh douhdg|
glvfxvvhg1 Zkhq wkhuh duh eruurzlqj dqg vkruw0vdoh frqvwudlqwv/ lqyhvwruv
zlwk orz ulvn dyhuvlrq lqyhvw ixoo| lq htxlwlhv dv d zd| wr pd{lpl}h wkhlu ulvn
dqg h{shfwhg uhwxuq zlwkrxw xvlqj ohyhudjh/ zkloh pruh ulvn0dyhuvh lqyhvwruv
krog erwk lqgh{hg erqgv dqg htxlwlhv1 Fdvk sod|v rqo| d plqru uroh dqg
rqo| lq wkh sruwirolrv ri wkh prvw ulvn0dyhuvh lqyhvwruv/ zkr duh doprvw ixoo|
lqyhvwhg lq lqgh{hg erqgv1
Wkhvh qglqjv duh uhodwhg wr wkh _dvvhw doorfdwlrq sx}}oh% ri Fdqqhu/
Pdqnlz/ dqg Zhlo +4<<:, glvfxvvhg lq Fkdswhu 41 Lqyhvwphqw dgylvhuv ri0
whq vxjjhvw wkdw pruh frqvhuydwlyh lqyhvwruv vkrxog kdyh d kljkhu udwlr ri
orqj0whup erqgv wr vwrfnv lq wkhlu sruwirolrv1 Fdqqhu/ Pdqnlz/ dqg Zhlo
grfxphqw wklv ihdwxuh ri frqyhqwlrqdo lqyhvwphqw dgylfh dqg srlqw rxw wkdw
lw lv lqfrqvlvwhqw zlwk wkh pxwxdo ixqg wkhruhp ri vwdwlf sruwirolr dqdo|vlv/
dffruglqj wr zklfk ulvn dyhuvlrq vkrxog dhfw rqo| wkh udwlr ri fdvk wr ulvn|
dvvhwv dqg qrw wkh uhodwlyh zhljkwv rq glhuhqw ulvn| dvvhwv1
Rxu dqdo|vlv vkrzv wkdw vwdwlf sruwirolr dqdo|vlv lv qrw rqo| lqdssursuldwh
lq wkhru|/ exw fdq eh vhulrxvo| plvohdglqj lq sudfwlfh/ zkhq lqyhvwphqw
rssruwxqlwlhv duh wlph0ydu|lqj dqg lqyhvwruv kdyh orqj wlph krul}rqv1 Wkh
sruwirolr doorfdwlrqv wr htxlwlhv dqg lqgh{hg erqgv lq Sdqho D ri Wdeoh 616
duh vwulnlqjo| frqvlvwhqw zlwk frqyhqwlrqdo lqyhvwphqw dgylfh1 Djjuhvvlyh
orqj0whup lqyhvwruv vkrxog krog vwrfnv/ zkloh frqvhuydwlyh rqhv vkrxog krog
orqj0whup erqgv dqg vpdoo dprxqwv ri fdvk1 Wkh h{sodqdwlrq lv wkdw orqj0
whup erqgv/ dqg qrw fdvk/ duh wkh ulvnohvv dvvhw iru orqj0whup lqyhvwruv1
D zhdnqhvv lq wklv uhvroxwlrq ri wkh dvvhw doorfdwlrq sx}}oh lv wkdw lw
dvvxphv wkdw orqj0whup erqgv duh lqgh{hg/ ru htxlydohqwo|/ wkdw wkhuh lv qr
lqdwlrq xqfhuwdlqw|1 Sdqho D ri Wdeoh 616 vkrzv wkdw qrplqdo erqgv sod|
d pxfk vpdoohu uroh lq rswlpdo sruwirolrv1 Lq d zruog zlwk qr lqgh{dwlrq/
e
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t|@?_@h_ _i@|L? *|L} i^|it @i @ }ih 5@hTi h@|L |@? ?_i i_ ML?_tc
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9:
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lq qrplqdo erqgv/ zkloh frqvwudlqhg lqyhvwruv krog rqo| htxlwlhv1 Dv ulvn
dyhuvlrq lqfuhdvhv/ lqyhvwruv pryh lqwr fdvk udwkhu wkdq orqj0whup qrplqdo
erqgv1 Iljxuh 615 looxvwudwhv wklv srlqw1 Wkh wrs sdqho ri wkh jxuh sorwv frq0
vwudlqhg doorfdwlrqv wr htxlwlhv/ d whq0|hdu qrplqdo erqg dqg d wkuhh0prqwk
qrplqdo eloo/ zkloh wkh erwwrp sdqho sorwv frqvwudlqhg p|rslf doorfdwlrqv1
Wkh krul}rqwdo d{lv phdvxuhv uhodwlyh ulvn wrohudqfh +4@, udwkhu wkdq uho0
dwlyh ulvn dyhuvlrq/ ehfdxvh erwk wrwdo dqg p|rslf doorfdwlrqv duh olqhdu lq
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wkh srvvlelolw| wkdw wkh vwdwh yduldeohv suhglfw fkdqjhv lq ulvn> wkh| fdq dhfw
sruwirolr fkrlfh rqo| e| suhglfwlqj fkdqjhv lq h{shfwhg uhwxuqv1 Dxwkruv
vxfk dv Fdpsehoo +4<;:,/ Kduyh| +4<;</ 4<<4,/ dqg Jorvwhq/ Mdjdqqdwkdq/
dqg Uxqnoh +4<<6, kdyh h{soruhg wkh delolw| ri wkh vwdwh yduldeohv xvhg khuh
wr suhglfw ulvn dqg kdyh irxqg rqo| prghvw hhfwv wkdw vhhp wr eh grplqdwhg
e| wkh hhfwv ri wkh vwdwh yduldeohv rq h{shfwhg uhwxuqv1 Lq wkh qh{w fkdswhu/
:8
LQYHVWRUVB
iroorzlqj Fkdfnr dqg Ylfhlud +4<<<,/ zh vkrz krz wr lqfoxgh fkdqjlqj ulvn
lq d orqj0whup sruwirolr fkrlfh sureohp1
Lw lv frpprq lq wkh frqwlqxrxv0wlph qdqfh olwhudwxuh wr dvvxph wkdw
pdunhwv duh frpsohwh/ wkdw lv/ wkdw wkh vwdwh yduldeohv jryhuqlqj lqyhvwphqw
rssruwxqlwlhv duh gulyhq e| wkh vdph vwrfkdvwlf surfhvvhv wkdw gulyh dvvhw
uhwxuqv vr wkdw lqqrydwlrqv wr lqyhvwphqw rssruwxqlwlhv duh shuihfwo| khgjh0
deoh xvlqj qdqfldo dvvhwv1 Wkh prgho +714, grhv qrw pdnh wklv dvvxpswlrq1
Zkhqhyhu wkhuh duh dgglwlrqdo vwdwh yduldeohv v|n lq wkh yhfwru }|n / dqg
zkhqhyhu wkh yduldqfh0fryduldqfh pdwul{ ri wkh YDU v|vwhp kdv ixoo
udqn/ wkhq vkrfnv wr lqyhvwphqw rssruwxqlwlhv duh lpshuihfwo| fruuhodwhg
zlwk vkrfnv wr dvvhw uhwxuqv dqg fdqqrw eh shuihfwo| khgjhg xvlqj qdqfldo
dvvhwv1 Wkh delolw| wr kdqgoh lqfrpsohwh pdunhwv lv dq lpsruwdqw hpslulfdo
dgydqwdjh ri wklv prgho1
Jlyhq rxu krprvnhgdvwlf YDU irupxodwlrq/ wkh xqfrqglwlrqdo glvwulex0
wlrq ri }| lv hdvlo| ghulyhg1 Wkh vwdwh yhfwru }| lqkhulwv wkh qrupdolw| ri wkh
vkrfnv y|n 1 Lw kdv xqfrqglwlrqdo phdq 5 dqg yduldqfh0fryduldqfh pdwul{
5 wkdw fdq vwudljkwiruzdugo| eh fdofxodwhg iurp wkh YDU frhflhqwv f /
/ dqg 1 Zh fdq dovr fdofxodwh wkh frqglwlrqdo prphqwv ri olqhdu dqg
txdgudwlf frpelqdwlrqv ri wkh yduldeohv1
e2 5L*?} |i 4L_i*

Zh vhhn d vroxwlrq wkdw vdwlvhv wkh orjolqhdu Hxohu htxdwlrqv iru wkh Hsvwhlq0
]lq prgho/ jlyhq wkh dssur{lpdwlrqv odlg rxw lq wkh suhylrxv wzr fkdswhuv1
Wkdw lv/ zh qhhg wr qg frqvxpswlrq dqg sruwirolr uxohv wkdw vdwlvi| wkh frq0
vxpswlrq Hxohu htxdwlrq +517:, dqg wkh sruwirolr Hxohu htxdwlrq iru pxowlsoh
ulvn| dvvhwv +517<,1 Wkh frqvxpswlrq Hxohu htxdwlrq fdq eh uhzulwwhq/ xv0
lqj rxu orjolqhdu dssur{lpdwlrq wr wkh lqwhuwhpsrudo exgjhw frqvwudlqw/ dv
d glhuhqfh htxdwlrq lq f| z| =
f| z| @ # orj "Rc| .+4#,H| +uRc|n ,.n.H| +f|n z|n ,> +716,
zkhuh "Rc| @ +@5#,Ydu| +f|n #uRc|n ,1 Wkh sruwirolr Hxohu htxdwlrq

fdq eh uhzulwwhq/ xvlqj rxu dssur{lpdwlrq wr wkh lqwhuwhpsrudo exgjhw frq0
vwudlqw dqg wkh idfw wkdw f|n @ +f|n z|n , . z|n / dv
2|
H| +u|n ufc|n ,. @ S3c| . Rc| fc| > +717,
5 #
zkhuh 2| lv d yhfwru frqwdlqlqj wkh yduldqfhv ri h{fhvv uhwxuqv/ S3c| @

Fry| +u|n ufc|n > f|n z|n , lv d yhfwru frqwdlqlqj wkh fryduldqfhv ri
:9
LQYHVWRUVB
h{fhvv uhwxuqv zlwk wkh orj frqvxpswlrq0zhdowk udwlr/ Rc| @ Fry| +u|n
ufc|n > uRc|n , lv d yhfwru frqwdlqlqj wkh fryduldqfhv ri h{fhvv uhwxuqv zlwk
wkh orj sruwirolr uhwxuq/ dqg fc| @ Fry| +u|n ufc|n > ufc|n , lv d yhf0
wru frqwdlqlqj wkh fryduldqfhv ri h{fhvv uhwxuqv zlwk wkh orj uhwxuq rq wkh
ehqfkpdun dvvhw1
Wr vroyh wkh prgho/ zh qrz jxhvv wkdw wkh rswlpdo sruwirolr dqg frq0
vxpswlrq uxohv wdnh wkh irup
| @ df . D }| > +718,
f| z| @ ef . e }| . e2 }| }| e2 = +719,
Wkdw lv/ wkh rswlpdo sruwirolr uxoh lv olqhdu lq wkh YDU vwdwh yhfwru exw wkh
rswlpdo frqvxpswlrq uxoh lv txdgudwlf1 df lv dq q0yhfwru/ D lv dq q p
pdwul{/ ef lv d vfdodu/ dqg e dqg e2 duh p0yhfwruv1
Wkh prwlydwlrq iru wklv jxhvv lv wkdw +718, lv wkh vlpsohvw sruwirolr uxoh
wkdw doorzv wkh lqyhvwru wr vkliw klv sruwirolr lq uhvsrqvh wr fkdqjlqj ulvn
suhpld1 Doo wkh yduldeohv lq wkh vwdwh yhfwru }| fdq srwhqwldoo| dhfw ulvn
suhpld/ dqg wkxv wkh sruwirolr yhfwru | pxvw eh iuhh wr uhvsrqg wr wkhp> zh
dvvxph wkdw lw grhv vr olqhduo|1 Jlyhq d olqhdu sruwirolr uxoh/ wkh h{shfwhg
sruwirolr uhwxuq lpsolhg e| +5156, lv txdgudwlf lq wkh vwdwh yduldeohv1 Vwdwh
yduldeohv dhfw wkh h{shfwhg sruwirolr uhwxuq erwk gluhfwo|/ e| vkliwlqj wkh
h{shfwhg uhwxuqv rq h{lvwlqj dvvhw kroglqjv/ dqg lqgluhfwo|/ e| vkliwlqj wkh
dvvhw doorfdwlrqv1 Vlqfh hdfk ri wkhvh hhfwv lv olqhdu/ wkhlu lqwhudfwlrq lv
txdgudwlf dqg wklv pdnhv wkh h{shfwhg sruwirolr uhwxuq txdgudwlf1 Exw wkhq
wkh frqvxpswlrq Hxohu htxdwlrq +716, lpsolhv wkdw wkh orj frqvxpswlrq0
zhdowk udwlr pxvw dovr eh dw ohdvw txdgudwlf lq wkh vwdwh yduldeohv1 Wkh
frqvxpswlrq Hxohu htxdwlrq dovr kdv d frqglwlrqdo yduldqfh whup/ exw wklv
wrr wxuqv rxw wr eh txdgudwlf lq wkh vwdwh yduldeohv jlyhq rxu krprvnhgdvwlf
YDU vshflfdwlrq1 Nlp dqg Rpehuj +4<<9, ghulyhg d vlplodu olqhdu0
txdgudwlf vroxwlrq iru d qlwh0krul}rq frqwlqxrxv0wlph prgho lq zklfk wkh
lqyhvwru kdv srzhu xwlolw| ghqhg ryhu whuplqdo zhdowk1
Wr yhuli| rxu jxhvv dqg vroyh iru wkh sdudphwhuv ri wkh vroxwlrq/ zh
zulwh wkh frqglwlrqdo prphqwv wkdw dsshdu lq +717, dv ixqfwlrqv ri wkh YDU
frhflhqwv dqg wkh xqnqrzq sdudphwhuv ri +718, dqg +719,1 Zh wkhq vroyh
iru wkh sdudphwhuv wkdw vdwlvi| +717,1 Wklv jlyhv xv wkh sdudphwhuv lq +718,
dv ixqfwlrqv ri wkh YDU frhflhqwv dqg wkh vwloo xqnqrzq sdudphwhuv ri
+719,1 Qh{w zh vxevwlwxwh lqwr +716,/ erwk vlghv ri zklfk duh txdgudwlf
lq wkh YDU vwdwh yduldeohv jlyhq rxu frqmhfwxuhg txdgudwlf irup iru wkh
rswlpdo frqvxpswlrq0zhdowk udwlr1 Ilqdoo| zh vroyh wklv v|vwhp ri txdgudwlf
htxdwlrqv iru wkh sdudphwhuv ri +719,1
::
LQYHVWRUVB
Jlyhq wkh orjolqhdul}dwlrq sdudphwhu / wklv vroxwlrq lv dqdo|wlfdo1 Fdps0
ehoo dqg Ylfhlud +4<<<, zulwh lw rxw h{solflwo| iru wkh vshfldo fdvh lq zklfk
wkhuh lv d frqvwdqw ulvnohvv lqwhuhvw udwh/ d vlqjoh ulvn| dvvhw/ dqg d vlqjoh
iruhfdvwlqj yduldeoh iru wkh h{fhvv ulvn| uhwxuq zklfk lwvhoi iroorzv dq DU+4,
surfhvv1 Zh h{sodlq wklv fdvh lq vhfwlrq 714161 Fdpsehoo/ Fkdq/ dqg Yl0
fhlud +5333, h{whqg wkh dssurdfk wr wkh jhqhudo YDU fdvh/ iru zklfk lw lv
pruh frqyhqlhqw wr vroyh wkh olqhdu0txdgudwlf htxdwlrqv qxphulfdoo|1
Wkh vroxwlrq suhvhqwhg khuh lv h{dfw lq frqwlqxrxv wlph zkhq dvvhw sulfhv
iroorz frqwlqxrxv glxvlrq surfhvvhv/ li wkh frqvxpswlrq0zhdowk udwlr lv frq0
vwdqw1 Wkh frqvxpswlrq0zhdowk udwlr lv frqvwdqw li wkh hodvwlflw| ri lqwhuwhp0
srudo vxevwlwxwlrq # @ 4/ exw lq doo rwkhu fdvhv/ wkh vroxwlrq lv rqo| dq
dssur{lpdwlrq1 Fdpsehoo dqg Nrr +4<<:, dqg Fdpsehoo/ Frffr/ Jrphv/
Pdhqkrxw/ dqg Ylfhlud +4<<<, hydoxdwh wkh dffxudf| ri wkh dssur{lpdwh
vroxwlrq/ uhvshfwlyho| lq prghov zlwk h{rjhqrxv sruwirolr uhwxuqv dqg h{rjh0
qrxv uhwxuqv rq xqghuo|lqj dvvhwv/ dqg qg wkdw lw lv dffhswdeo| dffxudwh
iru hodvwlflwlhv ri lqwhuwhpsrudo vxevwlwxwlrq xs wr derxw 61 Lq sduwlfxodu/
wklv lpsolhv wkdw orz hodvwlflwlhv ri lqwhuwhpsrudo vxevwlwxwlrq ri wkh vruw
hvwlpdwhg e| pdfurhfrqrplvwv vkrxog eh frqvlvwhqw zlwk wkh xvh ri wkh ds0
sur{lpdwh vroxwlrq1
Wkh fdvh # @ 4 lv dovr lpsruwdqw ehfdxvh rqo| lq wklv fdvh gr zh nqrz
wkdw wkh ydoxh ri htxdov 1 Lq doo rwkhu fdvhv zh pxvw vroyh iru dorqj
zlwk wkh rwkhu sdudphwhuv ri wkh prgho1 Zh gr wklv qxphulfdoo|> zh lql0
wldol}h @ / vroyh iru wkh rwkhu sdudphwhuv ri wkh prgho/ fdofxodwh wkh
lpsolhg phdq orj frqvxpswlrq0zhdowk udwlr iurp +719,/ uhfdofxodwh / dqg
uhshdw xqwlo frqyhujhqfh1 Wklv surfhvv lv h{wuhpho| udslg h{fhsw lq fdvhv
zkhuh wkh lqqlwh0krul}rq rswlpl}dwlrq sureohp lv loo0ghqhg +iru h{dpsoh/
ehfdxvh dyhudjh udwhv ri uhwxuq duh wrr kljk uhodwlyh wr wkh lqyhvwru*v udwh
ri wlph suhihuhqfh/ vr wkdw d qlwh0krul}rq lqyhvwru*v xwlolw| glyhujhv dv wkh
lqyhvwphqw krul}rq lqfuhdvhv,1
Dq lpsruwdqw surshuw| ri wkh prgho lv wkdw jlyhq wkh orjolqhdul}dwlrq
sdudphwhu / wkh rswlpdo sruwirolr uxoh grhv qrw ghshqg rq wkh lqwhuwhpsrudo
hodvwlflw| ri vxevwlwxwlrq #1 # rqo| dhfwv sruwirolr fkrlfh wr wkh h{whqw wkdw
lw hqwhuv lqwr wkh ghwhuplqdwlrq ri = Hpslulfdoo|/ wklv lqgluhfw hhfw wkurxjk
vhhpv wr eh plqru1
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whup ulvnohvv dvvhw zlwk d frqvwdqw uhdo orj uhwxuq us 1 Ehfdxvh wklv ulvnohvv
:;
LQYHVWRUVB
uhdo uhwxuq lv frqvwdqw/ lw lv d vdih lqyhvwphqw erwk iru vkruw0whup lqyhvwruv
dqg iru orqj0whup lqyhvwruv1 Wkxv wkh lvvxh hpskdvl}hg lq Fkdswhu 6/ wkdw
wkh lghqwlw| ri wkh ulvnohvv dvvhw pd| eh glhuhqw iru lqyhvwruv zlwk glhuhqw
krul}rqv/ grhv qrw dulvh khuh1 Fdpsehoo dqg Ylfhlud +4<<<, dovr dvvxph
wkdw wkhuh lv d vlqjoh ulvn| dvvhw +_vwrfnv%, zlwk orj uhwxuq u|n jlyhq e|
u|n H| u|n @ x|n > +71:,
zkhuh x|n lv wkh lqqrydwlrq wr wkh ulvn| dvvhw uhwxuq/ qrupdoo| glvwulexwhg
zlwk phdq }hur dqg yduldqfh 2 1 Wkh h{shfwhg h{fhvv orj uhwxuq rq wkh
ulvn| dvvhw/ dgmxvwhg iru rqh0kdoi lwv yduldqfh lq wkh idploldu pdqqhu/ htxdov
d vwdwh yduldeoh {| =
2
H| u|n us . @ {| = +71;,
5
Ilqdoo|/ {| iroorzv dq DU+4, surfhvv zlwk phdq dqg shuvlvwhqfh !1 Wkh
lqqrydwlrq wr {|n lv zulwwhq |n / dvvxphg wr eh qrupdoo| glvwulexwhg zlwk
phdq }hur dqg yduldqfh 2# =
{|n @ . !+{| , . |n = +71<,
Prghoolqj phdq uhyhuvlrq
Wkh lqqrydwlrqv x|n dqg |n fdq eh fruuhodwhg/ zlwk fryduldqfh # 1
Lq idfw/ wklv fryduldqfh lv zkdw jhqhudwhv lqwhuwhpsrudo khgjlqj ghpdqg iru
wkh ulvn| dvvhw e| orqj0whup lqyhvwruv1 Wkh vwdwh yduldeoh {| vxppdul}hv
lqyhvwphqw rssruwxqlwlhv dw wlph w1 Wkxv wkh frqglwlrqdo fryduldqfh ehwzhhq
wkh ulvn| dvvhw uhwxuq dqg wkh vwdwh yduldeoh phdvxuhv wkh delolw| ri wkh ulvn|
dvvhw wr khgjh wlph0yduldwlrq lq lqyhvwphqw rssruwxqlwlhv1 Wklv fryduldqfh
lv jlyhq e|
Fry| +u|n > {|n , @ Fry| +u|n > u|n2 , @ # = +7143,
Wkh prgho fdq eh vroyhg iru duelwudu| # / exw zh irfxv dwwhqwlrq rq wkh
fdvh zkhuh # ? 31 Wklv fdvh fdswxuhv wkh qrwlrq wkdw vwrfnv duh _phdq0
uhyhuwlqj%> dq xqh{shfwhgo| kljk uhwxuq wrgd| uhgxfhv h{shfwhg uhwxuqv lq
wkh ixwxuh/ dqg wkxv kljk vkruw0whup uhwxuqv whqg wr eh rvhw e| orzhu

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uhwxuqv ryhu wkh orqj whup1 Wklv rvhw uhgxfhv wkh frqglwlrqdo yduldqfh ri
orqj0whup vwrfn uhwxuqv/ vlqfh
Ydu| +u|n . u|n2 , @ 5Ydu| +u|n , . 5Fry| +u|n > u|n2 ,

@ 5Ydu| +u|n , . 5# ? 5Ydu| +u|n ,= +7144,
Wkdw lv/ wkh frqglwlrqdo yduldqfh ri vwrfn uhwxuqv grhv qrw jurz lq sursruwlrq
zlwk wkh lqyhvwphqw krul}rq/ exw jurzv pruh vorzo|1 Li zh fdofxodwh d
frqglwlrqdo yduldqfh udwlr/
Ydu| +u|n . u|n2 . ===u|ng ,

Y U| +N, > +7145,
NYdu| +u|n ,
wkh udwlr zloo eh ohvv wkdq rqh dw doo krul}rqv N1 Vwrfnv zloo dsshdu uhodwlyho|
vdihu wr orqj0whup lqyhvwruv1
Wkh glvfxvvlrq deryh frqfhqwudwhv rq frqglwlrqdo yduldqfhv/ vlqfh wkhvh
duh zkdw pdwwhu wr lqyhvwruv1 Wkh hpslulfdo olwhudwxuh rq phdq0uhyhuvlrq/
lqlwldwhg e| Srwhued dqg Vxpphuv +4<;;, dqg Idpd dqg Iuhqfk +4<;;e,/
w|slfdoo| hpskdvl}hv xqfrqglwlrqdo yduldqfhv lqvwhdg1 Wkhvh fdq ehkdyh
txlwh glhuhqwo| iurp frqglwlrqdo yduldqfhv vlqfh
Fry+u|n > {|n , @ Fry+{| . x|n > {|n , @ !2% . # = +7146,
Shuvlvwhqfh lq wkh surfhvv iru {|n fdq pdnh wklv xqfrqglwlrqdo fryduldqfh
}hur/ hyhq li wkh frqglwlrqdo fryduldqfh lv qhjdwlyh1 Fdpsehoo +4<<4, dqg
Fdpsehoo/ Or/ dqg PdfNlqod| +4<<:/ Fkdswhu :, hpskdvl}h wklv srlqw1
Pruh jhqhudoo|/ wkh xqfrqglwlrqdo yduldqfh udwlr/
Ydu+u|n . u|n2 . ===u|ng , Y U| +N,

Y U+N, @ > +7147,
NYdu+u|n , 4 U2 +N,
zkhuh U2 +N, lv wkh h{sodqdwru| srzhu ri d uhjuhvvlrq ri wkh N0shulrg vwrfn

uhwxuq rqwr wkh vwdwh yduldeoh {| 1 Wkxv wkh xqfrqglwlrqdo yduldqfh udwlr lv
dozd|v juhdwhu wkdq wkh frqglwlrqdo yduldqfh udwlr> hpslulfdo uhvxowv xvlqj
wkh iruphu xqghuvwdwh wkh ulvn0uhgxfwlrq wkdw lv uhohydqw iru orqj0whup lq0
yhvwruv1 Wkh glhuhqfh ehwzhhq wkh wzr yduldqfh udwlrv fdq eh vxevwdqwldo/
vlqfh dxwkruv vxfk dv Idpd dqg Iuhqfk +4<;;d, dqg Fdpsehoo dqg Vkloohu
+4<;;d/e, kdyh irxqg orqj0krul}rq U2 vwdwlvwlfv dv odujh dv 73(1 Zh h{soruh
wklv lvvxh hpslulfdoo| lq vhfwlrq 715151
Vroylqj wkh prgho
;3
LQYHVWRUVB
Wkh prgho lv d vshfldo fdvh ri wkh jhqhudo YDU v|vwhp1 Wkxv wkh
vroxwlrq wdnhv wkh irup
| @ df . d {|c +7148,
f| z| @ ef . e {| . e2 {2| = +7149,
Wkh txdgudwlf h{suhvvlrq iru wkh frqvxpswlrq0zhdowk udwlr lpsolhv wkdw wkh
ydoxh ixqfwlrq lq +5183, wdnhv wkh h{srqhqwldo0txdgudwlf irup

ef # orj+4 , e e2 2
Y| @ h{s . {| . { = +714:,
4# 4# 4# |
Nlp dqg Rpehuj +4<<9, ghulyh d vlplodu h{srqhqwldo0txdgudwlf vroxwlrq lq

d uhodwhg frqwlqxrxv0wlph prgho/ zkhuh d vlqjoh vwdwh yduldeoh iroorzv d
frqwlqxrxv0wlph DU+4, +Ruqvwhlq0Xkohqehfn, surfhvv dqg wkh lqyhvwru kdv
srzhu xwlolw| ghqhg ryhu whuplqdo zhdowk1 Vdpxhovrq +4<<4, ghulyhv vlplodu
uhvxowv lq d wkuhh0shulrg yhuvlrq ri wklv prgho1
Jlyhq wkh irup ri wkh ydoxh ixqfwlrq/ lw vkrxog qrw eh vxusulvlqj wkdw
wkh udwlrv e @+4 #, dqg e2 @+4 #, sod| d nh| uroh lq wkh vroxwlrq1 Wkhvh
udwlrv fdswxuh wkh olqhdu dqg txdgudwlf hhfwv ri wkh vwdwh yduldeoh {| rq
xwlolw|/ zklfk kdyh wkh vdph vljq dv wkh hhfwv ri {| rq frqvxpswlrq rqo|
zkhq lqfrph hhfwv grplqdwh vxevwlwxwlrq hhfwv/ wkdw lv/ zkhq # ? 41
Fdpsehoo dqg Ylfhlud +4<<<, vkrz wkdw wkh sdudphwhuv ri wkh sruwirolr uxoh
duh uhodwhg wr e @+4 #, dqg e2 @+4 #, dv iroorzv=

4 e e2 #
df @ 4 . 5+4 !, 2 > +714;,
4# 4#

4 4 e2 #
d @ . 4 5! 2 = +714<,
2 4#
Iru d p|rslf lqyhvwru/ zh zrxog kdyh df @ 3 dqg d @ 4@ 2 / vr lqwhuwhp0
srudo khgjlqj ghpdqg dffrxqwv iru wkh hqwluh uljkw0kdqg vlgh ri +714;, dqg
wkh vhfrqg whup rq wkh uljkw0kdqg vlgh ri +714<,1
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yhuvxv d Vkdush udwlr ri 316: iru vwrfnv1 Wkh eloo udwh kdv d orzhu phdq lq wkh
dqqxdo gdwdvhw/ dqg erwk eloo udwhv dqg |lhog vsuhdgv kdyh kljkhu vwdqgdug
ghyldwlrqv1
;:
LQYHVWRUVB
Wdeoh 714= Vdpsoh Vwdwlvwlfv

Vdpsoh Prphqw 4<851L 0 4<<<1LY 4;<3 0 4<<;
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;;
LQYHVWRUVB
Wdeoh 715 uhsruwv wkh hvwlpdwlrq uhvxowv iru wkh YDU v|vwhp lq wkh dq0
qxdo gdwdvhw/ zkloh Wdeoh 716 uhsruwv uhvxowv iru wkh txduwhuo| gdwdvhw1 Wkh
wrs vhfwlrq ri hdfk wdeoh uhsruwv frhflhqw hvwlpdwhv +zlwk w0vwdwlvwlfv lq
sduhqwkhvhv, dqg wkh U2 vwdwlvwlf +zlwk wkh s0ydoxh ri wkh I whvw ri mrlqw
vljqlfdqfh lq sduhqwkhvhv, iru hdfk htxdwlrq lq wkh v|vwhp1e Wkh erwwrp
vhfwlrq ri hdfk wdeoh vkrzv wkh fryduldqfh vwuxfwxuh ri wkh lqqrydwlrqv lq
YDU v|vwhp1 Wkh hqwulhv deryh wkh pdlq gldjrqdo duh fruuhodwlrq vwdwlvwlfv/
dqg wkh hqwulhv rq wkh pdlq gldjrqdo duh vwdqgdug ghyldwlrqv pxowlsolhg e|
4331 Doo yduldeohv lq wkh YDU duh phdvxuhg lq qdwxudo xqlwv/ vr vwdqgdug
ghyldwlrqv duh shu |hdu lq Wdeoh 715 dqg shu txduwhu lq Wdeoh 7161
Wkh uvw urz ri hdfk wdeoh fruuhvsrqgv wr wkh uhdo eloo udwh htxdwlrq1
Wkh odjjhg uhdo eloo udwh dqg wkh odjjhg qrplqdo eloo udwh duh vwdwlvwlfdoo|
vljqlfdqw lq erwk vdpsoh shulrgv> wkh vhuldo fruuhodwlrq ri wkh uhdo eloo udwh
lv sduwlfxoduo| vwurqj lq wkh srvwzdu txduwhuo| gdwd vhw1 Wkh uhvw ri wkh
yduldeohv duh hlwkhu qrw vljqlfdqw ru rqo| pdujlqdoo| vljqlfdqw lq suhglfwlqj
uhdo eloo udwhv rqh shulrg dkhdg1
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Suhglfwlqj h{fhvv vwrfn uhwxuqv lv glfxow= Wklv htxdwlrq kdv wkh orzhvw U2
lq erwk vdpsohv1 Wkh glylghqg0sulfh udwlr/ zlwk d srvlwlyh frhflhqw/ lv wkh
rqo| yduldeoh zlwk d w0vwdwlvwlf deryh 5 lq erwk vdpsohv1 Wkh frhflhqw
rq wkh odjjhg qrplqdo vkruw0whup lqwhuhvw udwh lv vljqlfdqwo| qhjdwlyh lq
wkh txduwhuo| vdpsoh/ exw doprvw }hur lq wkh dqqxdo vdpsoh1 Wkh |lhog
vsuhdg kdv d srvlwlyh frhflhqw lq erwk vdpsohv/ exw lw lv qrw vwdwlvwlfdoo|
vljqlfdqw1
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vsuhdgv khos suhglfw ixwxuh h{fhvv erqg uhwxuqv1 Lq wkh txduwhuo| srvwzdu
gdwd/ rqo| odjjhg h{fhvv vwrfn uhwxuqv kdyh suhglfwlyh srzhu1 Wkh w ri wkh
htxdwlrq lv dovr pxfk zruvh wkdq wkh w lq wkh dqqxdo vdpsoh1 Lq sduw/
wklv glhuhqfh lq uhvxowv pd| uhhfw dssur{lpdwlrq huuru lq rxu surfhgxuh
iru frqvwuxfwlqj dqqxdo erqg uhwxuqv> wkh srvvlelolw| ri vxfk huuru vkrxog eh
nhsw lq plqg zkhq plqwhusuhwlqj rxu dqqxdo uhvxowv1
Wkh odvw wkuhh urzv uhsruw wkh hvwlpdwlrq uhvxowv iru wkh uhpdlqlqj vwdwh
yduldeohv/ hdfk ri zklfk lv idluo| zhoo ghvfulehg e| d shuvlvwhqw xqlyduldwh
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LQYHVWRUVB
Wdeoh 715= YDU Hvwlpdwlrq Uhvxowv

Dqqxdo Vdpsoh +4;<3 0 4<<;,
Ghshqghqw uwe| {u| {e| || +g s,| vsu| U2
Yduldeoh +w, +w, +w, +w, +w, +w, +s,
YDU Hvwlpdwlrq Uhvxowv
uwe|n 31639 031387 3144< 319:: 031339 031;3; 3156;
+51789, +041696, +31;:6, +515:<, +03153;, +0415;;, +31333,
{u|n 31444 313;3 0313;5 031353 31468 41698 31385
+31753, +31979, +0315:8, +03135<, +516;;, +41345, +316:;,
{e|n 31534 31439 0314<: 031448 31345 51956 316<4
+613::, +51<;7, +041838, +03165;, +31939, +815:9, +31333,
||n 031375 031345 31369 31<53 031338 03134< 31::8
+041<49, +041;39, +41643, +4515;8, +041477, +031488, +31333,
+g s,|n 031895 03145< 3167; 031985 31;6: 041:6< 31:46
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vsu|n 31353 31335 031346 313;: 31337 31;56 31873
+4143;, +31774, +03197<, +41993, +41534, +;1<57, +31333,
Furvv0Fruuhodwlrq ri Uhvlgxdov
uwe {u {e | +g s, vsu
uwe :1985 0314;; 031347 31457 31459 03149;
{u 0 4:1965 031358 031477 031:66 314<<
{e 0 0 813;4 031979 03137; 3158<
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vsu 0 0 0 0 0 31<:<
<3
LQYHVWRUVB
Wdeoh 716= YDU Hvwlpdwlrq Uhvxowv

Txduwhuo| Vdpsoh +4<851LL 0 4<<<1LY,
Ghshqghqw uwe| {u| {e| || +g s,| vsu| U2
Yduldeoh +w, +w, +w, +w, +w, +w, +s,
YDU Hvwlpdwlrq Uhvxowv
uwe|n 31777 31337 031345 3157; 031334 31784 3166<
+91899, +31;47, +03198:, +61654, +031;:7, +516<5, +31333,
{u|n 31958 31357 3176< 041<;4 31377 317<3 313;7
+3195:, +315<3, +41::3, +051545, +513<<, +314<5, +3133;,
{e|n 31383 031388 0313<3 3165: 31336 61383 313<9
+31487, +051:9:, +031;35, +31:88, +31765, +51:88, +31336,
||n 03133; 31337 31338 31<88 031333 31449 31;9<
+03153:, +41;67, +3168:, +4<1869, +031554, +413<4, +31333,
+g s,|n 031;68 031356 031745 415<9 31<98 0414;< 31<66
+031;43, +03158<, +04187:, +416<8, +771;34, +031784, +31333,
vsu|n 031333 031334 31335 31358 031333 31:7: 3186<
+031333, +03166<, +31596, +31;67, +03153:, +431;<8, +31333,
Furvv0Fruuhodwlrq ri Uhvlgxdov
uwe {u {e | +g s, vsu
uwe 3187< 31568 316<7 0316<3 031568 314;:
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<4
LQYHVWRUVB
txduwhuo| srvwzdu gdwd/ uhhfwlqj wkh vwhhs ghfolqh lq wklv udwlr gxulqj wkh
4<<3*v1
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wkh lqqrydwlrqv lq wkh YDU v|vwhp1 Xqh{shfwhg orj h{fhvv vwrfn uhwxuqv
duh kljko| qhjdwlyho| fruuhodwhg zlwk vkrfnv wr wkh orj glylghqg0sulfh udwlr
lq erwk vdpsohv1 Wklv uhvxow lv frqvlvwhqw zlwk suhylrxv hpslulfdo uhvxowv
lq Fdpsehoo +4<<4,/ Fdpsehoo dqg Ylfhlud +4<<<,/ Vwdpedxjk +4<<<, dqg
rwkhuv1 Xqh{shfwhg orj h{fhvv erqg uhwxuqv duh qhjdwlyho| fruuhodwhg zlwk
vkrfnv wr wkh qrplqdo eloo udwh/ exw zhdno| srvlwlyho| fruuhodwhg zlwk wkh
|lhog vsuhdg1
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ri uhfhqw vwxglhv wkdw dsso| Prqwh Fduor dqdo|vlv wr mxgjh wkh vwdwlvwlfdo
hylghqfh iru suhglfwdelolw| lq vwrfn dqg erqg uhwxuqv1 Vwrfn0pdunhw vwxglhv
w|slfdoo| qg wkdw dv|pswrwlf whvwv ryhuvwdwh wkh hylghqfh iru suhglfwdelolw|
ri vwrfn uhwxuqv +Krgulfn 4<<5/ Jrhw}pdqq dqg Mrulrq 4<<6/ Qhovrq dqg
Nlp 4<<6,1 Erqg0pdunhw vwxglhv/ rq wkh rwkhu kdqg/ qg wkdw dv|pswrwlf
surfhgxuhv duh dfwxdoo| frqvhuydwlyh dqg xqghuvwdwh wkh hylghqfh iru suh0
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edvhg rq srvlwlyh uhjuhvvlrq frhflhqwv ri vwrfn uhwxuqv rq wkh glylghqg0
sulfh udwlr/ zkloh dv|pswrwlf uhvxowv lq wkh erqg pdunhw duh edvhg rq srvl0
wlyh uhjuhvvlrq frhflhqwv ri erqg uhwxuqv rq wkh |lhog vsuhdg1 Vwdpedxjk
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vljq wr wkh vljq ri wkh fruuhodwlrq ehwzhhq lqqrydwlrqv lq uhwxuqv dqg lqqryd0
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zh sorw wkh dqqxdol}hg vwdqgdug ghyldwlrqv ri uhdo uhwxuqv rq vwrfnv dqg eloov
lpsolhg e| rxu dqqxdo YDU iru lqyhvwphqw krul}rqv xs wr 433 |hduv +sdqho
<5
LQYHVWRUVB
D, dqg lpsolhg e| rxu txduwhuo| YDU iru lqyhvwphqw krul}rqv xs wr 433
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<6
LQYHVWRUVB
Annual Data, 1892-1998
0.18
annualized standard deviation of k-period return
0.16
0.14
0.12
0.1 T-bills, rolled

Equities
Long bond, rolled
0.08 Bond held to mat. k
0.06
0 10 20 30 40 50 60 70 80 90 100
holding period, k, in years
Quarterly Data, 1953Q2-1999Q4
0.16 T-bills, rolled

annualized standard deviation of k-period return
Equities
0.14 5-year bond, rolled
Bond held to mat. k
0.12
0.1
0.08
0.06
0.04
0.02
0
0 10 20 30 40 50 60 70 80 90 100
holding period, k, in quarters
Iljxuh 715= Yduldelolw| ri Pxowlshulrg Dvvhw Uhwxuqv
<7
LQYHVWRUVB
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Iru vlpsolflw|/ erwk vhfwlrqv 814 dqg 815 zrun zlwk wlph0vhsdudeoh srzhu
xwlolw|1 Vhfwlrq 816 suhvhqwv uhfxuvlyh xwlolw|/ wkh frqwlqxrxv0wlph htxlydohqw
ri wkh Hsvwhlq0]lq suhihuhqfhv lqwurgxfhg lq Fkdswhu 51 Ilqdoo|/ vhfwlrq 817
dssolhv wkh phwkrgv ri wklv fkdswhu wr vroyh d orqj0whup sruwirolr fkrlfh
sureohp zlwk wlph0ydu|lqj vwrfn pdunhw yrodwlolw|1
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wlqj1 Wkh Ehoopdq rswlpdolw| sulqflsoh lv d xvhixo wrro iru vroylqj g|qdplf
sruwirolr sureohpv/ ehfdxvh lw doorzv wkh wudqvirupdwlrq ri d g|qdplf rs0
wlpl}dwlrq sureohp lqwr d glhuhqwldo htxdwlrq/ iru zklfk vhyhudo vroxwlrq
phwkrgv duh dydlodeoh1
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wr wkh lqyhvwru/ d ulvn| dvvhw zlwk lqvwdqwdqhrxv wrwdo uhwxuq gS| @S| dqg
dq lqvwdqwdqhrxvo| ulvnohvv dvvhw zlwk uhwxuq gE| @E| 1 Wkhuh lv dovr d vlqjoh
vwdwh yduldeoh V| gulylqj wkh g|qdplfv ri wkh lqyhvwphqw rssruwxqlw| vhw1
Lw lv frqfhswxdoo| vwudljkwiruzdug wr h{whqg wkh dqdo|vlv wr pxowlsoh dvvhwv
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Zh dvvxph wkdw erwk uhwxuqv dqg wkh vwdwh yduldeoh iroorz glxvlrq sur0
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gV| @ 7 +V> w, gw . 7 +V> w, g]7c| > +816,
zlwk g]c| g]7c| @ 7 +V> w, gw1 Qrwh wkdw wkh guliwv/ yrodwlolwlhv/ dqg fruuh0
odwlrqv ri wkhvh surfhvvhv pd| eh ixqfwlrqv ri wkh vwdwh yduldeoh dqg wlph1
Lq wkh iroorzlqj htxdwlrqv/ krzhyhu/ zh riwhq rplw wklv ghshqghqfh/ zulwlqj
iru h{dpsoh lqvwhdg ri +V> w,> wklv vlpsohu qrwdwlrq lv ohvv fduhixo exw
pruh uhdgdeoh1
Jlyhq wlph0vhsdudeoh suhihuhqfhv ghqhg ryhu frqvxpswlrq/ dqg lqlwldo
zhdowk Zf A 3/ zh fdq irupxodwh wkh rswlpdo sruwirolr dqg frqvxpswlrq
sureohp iru d orqj0whup lqyhvwru dv
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pd{ Hf X +F> w, gw +817,
ck f
vxemhfw wr wkh frqwlqxrxv0wlph lqwhuwhpsrudo exgjhw frqvwudlqw
gZ @ ^+ + u, . u, Z F` gw . Z g] +818,
dqg wkh frqvwudlqwv Zf A 3/ Z| A 3/ dqg F| A 31 Khuh ghqrwhv wkh

iudfwlrq ri zhdowk lqyhvwhg lq wkh ulvn| dvvhw/ dqg F ghqrwhv frqvxpswlrq1
Ohw M+Z> V> w, ghqrwh wkh pd{lpl}hg xwlolw| ixqfwlrq/ ru ydoxh ixqfwlrq/
ri wklv sureohp1 Phuwrq +4<:4/ 4<:6, vkrzv wkdw wkh Ehoopdq sulqflsoh
lpsolhv=
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dqg ixwxuh frqvxpswlrq1 Frqvxpswlrq wrgd| lv dfklhyhg dw wkh h{shqvh ri
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Khuh zh xvh vxevfulswv wr ghqrwh sduwldo ghulydwlyhv/ h{fhsw wkdw zh zulwh rxw
wkh sduwldo wlph ghulydwlyh ri M h{solflwo| dv CM@Cw wr dyrlg dq| srvvlelolw|
ri frqixvlrq zlwk wkh ydoxh ri wkh ixqfwlrq M dw wlph w1 Xvlqj wkh vwrfkdvwlf
glhuhqwldo htxdwlrqv iru gV dqg gZ jlyhq lq +816, dqg +818,/ dqg wkh uxohv
ri vwrfkdvwlf fdofxoxv/ zh fdq hdvlo| frpsxwh dq h{suhvvlrq iru wkh h{shfwhg
lqvwdqwdqhrxv fkdqjh lq wkh ydoxh ixqfwlrq1 Vxevwlwxwlrq ri wkh h{suhvvlrq
iru H| ^gM+Z> V> w,`@gw lqwr +819, jlyhv dq htxdwlrq wkdw ghshqgv rq F/ / dqg
wkh ydoxh ixqfwlrq=
3 @ pd{ iX +F> w, . M` ^+ + u, . u, Z F` . M7 7 . CM@Cw
kc

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5 5
Phuwrq +4<9<, qrwhv wkdw wklv htxdwlrq pxvw yhuli| wkh erxqgdu| frqgl0
wlrq
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wudqvyhuvdolw| frqglwlrq hqvxulqj wkdw wkh ydoxh ixqfwlrq lv erxqghg lq wkh
olplw/ l1h1/ wkdw wkhuh lv qr lqyhvwphqw vwudwhj| wkdw doorzv wkh lqyhvwru wr
dfklhyh lqqlwh xwlolw|1
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ghulydwlyhv ri +81;, zlwk uhvshfw wr F dqg 1 Zh rewdlq d sdlu ri h{suhvvlrqv
iru frqvxpswlrq dqg sruwirolr fkrlfh dv d ixqfwlrq ri zhdowk=
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M` ` Z 7
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wkh yduldeohv Z / V/ dqg w/ zkloh wkh ulvnohvv udwh dqg wkh prphqwv ri wkh
ulvn| dvvhw uhwxuq doo ghshqg rq V dqg w1 Iru vlpsolflw| wkhvh ghshqghqfhv
duh rplwwhg iurp wkh qrwdwlrq/ exw wkh| vkrxog qrw eh irujrwwhq1
Htxdwlrq +8143, ghwhuplqhv wkh rswlpdo frqvxpswlrq srolf|1 Lw lv nqrzq
dv wkh _hqyhorsh frqglwlrq/% ehfdxvh lw lpsolhv wkdw dw wkh rswlpxp dq h{wud
xqlw ri fxuuhqw frqvxpswlrq lv dv ydoxdeoh wr wkh lqyhvwruv dv dq h{wud xqlw
ri zhdowk wr qdqfh ixwxuh frqvxpswlrq1
Htxdwlrq +8144, ghwhuplqhv wkh rswlpdo sruwirolr doorfdwlrq wr wkh ulvn|
dvvhw1 Lw lv wkh frqwlqxrxv0wlph frxqwhusduw ri +6147,1 Wkh uvw whup ri
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wklv htxdwlrq lv wkh idploldu p|rslf sruwirolr uxoh= Wkh rswlpdo doorfdwlrq
wr wkh ulvn| dvvhw lv sursruwlrqdo wr wkh dvvhw*v ulvn suhplxp/ dqg lqyhuvho|
sursruwlrqdo wr lwv yrodwlolw| dqg wkh uhodwlyh ulvn dyhuvlrq ri wkh lqyhvwru*v
ydoxh ixqfwlrq1 Wkh vhfrqg whup lv wkh lqwhuwhpsrudo khgjlqj frpsrqhqw1 Lw
lv qrq0}hur dv orqj dv lqyhvwphqw rssruwxqlwlhv duh wlph0ydu|lqj +7 A 3,/
wkh| duh fruuhodwhg zlwk lqvwdqwdqhrxv uhdol}hg uhwxuqv rq wkh ulvn| dvvhw
+ 7 9@ 3,/ dqg wkh| dhfw wkh pdujlqdo xwlolw| ri zhdowk +M` 7 9@ 3,1
Htxdwlrqv +8143, dqg +8144, duh qrw d frpsohwh vroxwlrq wr wkh prgho
ehfdxvh wkh| ghshqg rq wkh ydoxh ixqfwlrq/ zklfk lv vwloo xqnqrzq1 Krz0
hyhu/ vxevwlwxwlrq ri wkhvh h{suhvvlrqv iru rswlpdo frqvxpswlrq dqg sruwirolr
fkrlfh edfn lqwr wkh Ehoopdq htxdwlrq +81;, gholyhuv d vhfrqg0rughu sduwldo
glhuhqwldo htxdwlrq +SGH, iru wkh ydoxh ixqfwlrq M+Z> V> w,1 Rqfh zh kdyh
vroyhg wklv htxdwlrq iru wkh ydoxh ixqfwlrq/ zh fdq rewdlq wkh rswlpdo srol0
flhv e| vxevwlwxwlqj wkh ydoxh ixqfwlrq lqwr wkh uvw0rughu frqglwlrqv iru
frqvxpswlrq dqg sruwirolr fkrlfh1
Xqiruwxqdwho|/ lw lv qrw jhqhudoo| vwudljkwiruzdug wr qg dq dqdo|wlfdo
vroxwlrq iru wkh SGH wkdw jlyhv wkh ydoxh ixqfwlrq1 Wklv w|sh ri htxdwlrq lv
vroyhg dqdo|wlfdoo| xvlqj wkh phwkrg ri xqghwhuplqhg frhflhqwv1 Wkdw lv/
rqh pdnhv d jxhvv derxw wkh ixqfwlrqdo irup ri wkh vroxwlrq/ dqg vkrzv wkdw
lw yhulhv wkh sduwldo glhuhqwldo htxdwlrq iru vrph ydoxhv ri wkh sdudphwhuv
ghqlqj wkh ixqfwlrqdo jxhvv1 Krzhyhu/ qglqj vxfk d ixqfwlrq lv qrw dozd|v
hdv|1 Lq vrph fdvhv/ lw lv srvvleoh wr wudqvirup wkh SGH lqwr dq ruglqdu|
glhuhqwldo htxdwlrq +RGH,/ dqg wkhuh duh kdqgerrnv vxfk dv Sro|dqlq dqg
]dlwvhy +4<<8, wkdw khos lghqwli| ruglqdu| glhuhqwldo htxdwlrqv zlwk nqrzq
h{dfw vroxwlrqv1 Exw li qr h{dfw vroxwlrq lv nqrzq/ lw lv qhfhvvdu| wr uhvruw
wr qxphulfdo dojrulwkpv vxfk dv wkrvh h{sodlqhg lq Mxgg +4<<;, ru Urjhuv
dqg Wdod| +4<<:,1
Wkh vshfldo fdvhv zlwk nqrzq dqdo|wlfdo vroxwlrqv fdq eh olvwhg txlwh
eulh|12 Phuwrq +4<9</ 4<:4/ 4<:6, vkrzhg wkdw htxdwlrq +819, kdv dq h{dfw
dqdo|wlfdo vroxwlrq li lqyhvwruv* xwlolw| ri frqvxpswlrq lv orjdulwkplf/ ru li
xwlolw| lv srzhu dqg lqyhvwphqw rssruwxqlwlhv duh frqvwdqw1 Lq erwk fdvhv/
dv zh qrwhg lq Fkdswhu 5/ wkh lqwhuwhpsrudo dvvhw doorfdwlrq sureohp lv
hvvhqwldoo| htxlydohqw wr d rqh0shulrg sureohp/ dqg rswlpdo sruwirolr fkrlfh
lv p|rslf1
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zh fdq vroyh wkh sureohp h{dfwo| surylghg wkdw pdunhwv duh frpsohwh
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fruuhodwlrq ehwzhhq wkh vwdwh yduldeoh dqg wkh vwrfn uhwxuqdqg lqyhvwruv
pd{lpl}h wkh xwlolw| ri whuplqdo zhdowk dw vrph {hg krul}rq1 Xvlqj wkh
phwkrg ri Fr{ dqg Kxdqj +4<;<,/ Zdfkwhu +4<<<, kdv h{whqghg wklv vroxwlrq
wr wkh fdvh ri lqyhvwruv zkr pd{lpl}h xwlolw| ryhu frqvxpswlrq hdfk shulrg1
Vfkurghu dqg Vnldgdv +4<<<, dqg Ilvkhu dqg Jloohv +4<<;, dovr h{soruh wkh
lpsolfdwlrqv ri frpsohwh pdunhwv iru rswlpdo sruwirolr fkrlfh zkhq lqyhvwruv
kdyh uhfxuvlyh xwlolw|1 Fkdfnr dqg Ylfhlud +4<<<, vkrz wkdw zh fdq rewdlq
dq h{dfw vroxwlrq wr wkh frqwlqxrxv0wlph sureohp zlwkrxw dvvxplqj wkdw
pdunhwv duh frpsohwh/ surylghg wkdw lqyhvwruv* hodvwlflw| ri lqwhuwhpsrudo
vxevwlwxwlrq lv rqh1
Lq doo rwkhu fdvhv/ wkhuh duh qr nqrzq h{dfw dqdo|wlfdo vroxwlrqv1 Krz0
hyhu/ zh fdq uhvruw wr dq dssur{lpdwh dqdo|wlfdo vroxwlrq phwkrg ri wkh
vruw zh lqwurgxfhg lq suhylrxv fkdswhuv iru glvfuhwh0wlph frqvxpswlrq dqg
sruwirolr fkrlfh sureohpv1 Zh looxvwudwh wklv dssurdfk lq wkh qh{w vhfwlrq
e| vwxg|lqj dq h{dpsoh/ wkh frqwlqxrxv0wlph frxqwhusduw ri wkh prgho zlwk
wlph0ydu|lqj uhdo lqwhuhvw udwhv lqwurgxfhg lq Fkdswhu 61
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jhqhudo/ h{fhsw iru wkh olplwhg qxpehu ri dvvhwv dqg vwdwh yduldeohv1 Wr
dsso| wklv vroxwlrq phwkrg wr d sduwlfxodu sureohp zh qhhg wr eh pruh
vshflf derxw wkh gluhfw xwlolw| ixqfwlrq X+=, dqg wkh lqyhvwphqw rssruwx0
qlw| vhw1 Lq wklv vhfwlrq zh vroyh d vlpsoh h{dpsoh/ zkhuh lqyhvwruv kdyh
wlph0vhsdudeoh srzhu xwlolw| ryhu frqvxpswlrq zlwk frqvwdqw uhodwlyh ulvn
dyhuvlrq / X+F| , @ F|3 @+4 ,/ dqg zkhuh wlph0yduldwlrq lq lqyhvwphqw
rssruwxqlwlhv lv fuhdwhg e| d wlph0ydu|lqj uhdo lqwhuhvw udwh/ vr wkdw V| @ u| 1
Wr nhhs rxu qrwdwlrq dv vlpsoh dv srvvleoh/ zh dovr dvvxph wkdw wkh lqyhvwru
fdq fkrrvh rqo| ehwzhhq dq lqvwdqwdqhrxv vkruw0whup uhdo erqg sd|lqj ugw
dqg d orqj0whup uhdo erqg1
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surfhvv dv lq Ydvlfhn +4<::,=
gu| @ o +o u| , gw . o g]o > +8145,
zkhuh o 5 +3> 4, dqg o A 31 Ohw S +u| > W w, ghqrwh wkh sulfh ri d uhdo
}hur0frxsrq erqg zlwk W w shulrgv wr pdwxulw|1 Ydvlfhn +4<::, vkrzv wkdw
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qr0duelwudjh lpsolhv wkh iroorzlqj g|qdplfv iru erqg uhwxuqv=
gS +u| > W w,
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S +u| > W w,
zkhuh ghwhuplqhv wkh ulvn suhplxp rq wkh erqg dqg e+W w, @ 3 o +4
h{sio +W w,j, So @S 1 Wkxv uhdo erqgv lq wklv prgho kdyh d frqvwdqw
h{shfwhg h{fhvv uhwxuq htxdo wr e+W w, dqg d frqvwdqw lqvwdqwdqhrxv
uhwxuq yrodwlolw| htxdo wr e+W w,o 1 Wkhuh lv rqo| rqh vrxufh ri xqfhuwdlqw|
lq wklv prgho/ dqg erqg uhwxuqv duh shuihfwo| qhjdwlyho| fruuhodwhg zlwk wkh
vkruw0whup uhdo lqwhuhvw udwh1 Wklv lv wkh frqwlqxrxv0wlph frxqwhusduw ri wkh
uhdo0lqwhuhvw0udwh prgho lq Fkdswhu 61
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zulwwhq dv %] &
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pd{ Hf h3q| | gw +8147,
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gZ| @ ê +W w, . u| Z| F| ` gw Z| e +W w, o g]o = +8148,
Wr qg wkh rswlpdo frqvxpswlrq dqg sruwirolr srolflhv iru wklv prgho zh
iroorz wkh vwhsv ghvfulehg lq vhfwlrq +81414,1 Wkh Ehoopdq htxdwlrq iru wklv
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5 5
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M` ` Z@M` e o M` ` Z e
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ruglqdu| glhuhqwldo htxdwlrq +RGH, iru wkh ydoxh ixqfwlrq M+Z> u> w,1 Wr
vroyh wklv htxdwlrq zh jxhvv wkdw wkh ydoxh ixqfwlrq wdnhv wkh irup
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zkhuh K+u| , lv d ixqfwlrq rqo| ri wkh lqvwdqwdqhrxv lqwhuhvw udwh1 Wklv jxhvv
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htxdwlrq ehorqjv wr wkh ghjhqhudwh k|shujhrphwulf htxdwlrq fodvv1 Wklv
htxdwlrq kdv dq h{dfw vroxwlrq jlyhq lq Sro|dqlq dqg ]dlwvhy +4<<8,1 Xqiru0
wxqdwho| wklv vroxwlrq lv d frpsolfdwhg h{suhvvlrq lqyroylqj jdppd ixqfwlrqv
zklfk lv h{wuhpho| kdug wr lqwhusuhw1
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wr wkh sureohp1 Wkh vroxwlrq lv edvhg rq d orj0olqhdu h{sdqvlrq ri wkh
frqvxpswlrq0zhdowk udwlr durxqg lwv xqfrqglwlrqdo phdq1 Wklv lv h{dfwo|
wkh vdph w|sh ri dssur{lpdwlrq wkdw zh xvhg lq Fkdswhuv 6 dqg 7/ exw
lqvwhdg ri xvlqj lw wr olqhdul}h wkh lqwhuwhpsrudo exgjhw frqvwudlqw/ zh xvh
lw khuh wr vroyh wkh Ehoopdq htxdwlrq1
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Z|
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K +u| ,3 kf . k +f| z| , > +8155,
zkhuh kf @ h{s if zj ^4 +f z,`/ k @ h{s if zj/ dqg +f z, @

H^f| z| `1 Vxevwlwxwlqj +8155, iru K+u| ,3 lq wkh uvw whup ri +8153,/ lw
lv hdv| wr vhh wkdw wkh uhvxowlqj RGH kdv d vroxwlrq ri wkh irup K+u| , @
h{s iFf . F u| j1 Wklv lpsolhv wkdw wkh orj frqvxpswlrq0zhdowk udwlr lv olq0
hdu lq wkh ulvnohvv uhdo lqwhuhvw udwh= f| z| @ F u| Ff 1
Rxu dssurdfk uhsodfhv wkh whup wkdw fdxvhv wkh qrq0olqhdu RGH +8153,
wr eh qrq0vroydeoh dqdo|wlfdoo| zlwk d orj0olqhdu dssur{lpdwlrq1 Wkxv zh
wudqvirup wkh htxdwlrq lqwr dqrwkhu RGH zlwk d nqrzq dqdo|wlfdo vroxwlrq1
Li wkh orj0olqhdu dssur{lpdwlrq lv dffxudwh/ wkh h{dfw dqdo|wlfdo vroxwlrq wr
wkh dssur{lpdwh RGH zloo dovr yhuli| wkh ruljlqdo RGH vxemhfw wr vrph
447
WLPH
dssur{lpdwlrq huuru/ dqg fdq eh uhjdughg dv dq dssur{lpdwh dqdo|wlfdo vr0
oxwlrq wr wkh ruljlqdo RGH1 Zh zloo dovr vkrz wkdw wkh dssur{lpdwlrq huuru
lv }hur iru wkh vshfldo fdvhv ri orj xwlolw| dqg frqvwdqw lqyhvwphqw rssruwx0
qlwlhv1
Wkh dssur{lpdwh RGH ohdgv wr wzr dojheudlf htxdwlrqv iru F dqg Ff
jlyhq lq wkh Dsshqgl{1 Wkh uvw htxdwlrq lv olqhdu lq wkh frhflhqw F /
zlwk vroxwlrq
4 4
F @ 4 = +8156,
k . o
Wkh vhfrqg htxdwlrq lqyroyhv erwk frhflhqwv/ exw lw lv olqhdu lq Ff jlyhq
F 1 Lwv vroxwlrq lv d ixqfwlrq ri doo wkh sdudphwhuv lq wkh prgho1
Wkh dssur{lpdwh vroxwlrq lpsolhv wkh ydoxh ixqfwlrq
Z|3
M +Z> u> w, @ h{s iw . Ff . F u| j > +8157,
4
dqg wkh rswlpdo srolflhv

4 4
f| z| @ Ff . 4 u| > +8158,
k . o

4 4 4
@ 2
. 4 = +8159,
e +W w, o e +W w, +k . o ,
Wklv lv wkh frqwlqxrxv0wlph htxlydohqw ri wkh glvfuhwh0wlph dssur{lpdwh vr0
oxwlrq jlyhq lq Fkdswhu 61 Wkh rswlpdo sruwirolr srolf| lv d zhljkwhg dyhudjh
ri wzr whupv/ zlwk zhljkwv jlyhq e| wkh lqyhvwru*v frhflhqw ri uhodwlyh ulvn
wrohudqfh dqg rqh plqxv wklv frhflhqw1 Lw lv vwudljkwiruzdug wr vkrz wkdw
wkh vroxwlrq lv h{dfw lq wkh orj xwlolw| fdvh zkhuh @ 41 Lq wklv fdvh/
F| @Z| @ dqg @ @e +W w, 2o 1 Wklv lv wkh h{dfw vroxwlrq lpsolhg e|
wkh Ehoopdq htxdwlrq +8153, zlwk @ 41
De ? @*|ih?@|i @TThL 4@|i @?@*)|U@* tL*|L?

Wkh dssur{lpdwh dqdo|wlfdo vroxwlrqv zh kdyh suhvhqwhg vr idu duh edvhg
rq dq h{sdqvlrq ri wkh rswlpdo orj frqvxpswlrq0zhdowk udwlr durxqg lwv
xqfrqglwlrqdo phdq/ H^f| z| `1 Iru h{dpsoh/ wkh rswlpdo uxohv +8158,0
+8159, ghshqg rq wklv phdq wkurxjk wkh orjolqhdul}dwlrq frhflhqw k
h{siH^f| z| `j1 H{fhsw lq vrph vshfldo fdvhv/ zkhuh k lv d nqrzq frq0
vwdqw/ zh qhhg wr vroyh iru k qxphulfdoo| wr frpsxwh ydoxhv iru wkh rswlpdo
srolflhv1 Zh kdyh vkrzq lq vhfwlrqv 614 dqg 714 wkdw zh fdq qg k xvlqj d
448
WLPH
vlpsoh uhfxuvlyh surfhgxuh1 Krzhyhu/ zh fdq vwloo ghulyh d qxpehu ri surs0
huwlhv ri wkh vroxwlrq zlwkrxw vroylqj h{solflwo| iru wklv frhflhqw/ xvlqj wkh
idfw wkdw lw lv erxqghg ehwzhhq }hur dqg rqh1 Iru h{dpsoh/ k A 3 lpsolhv
wkdw wkh lqwhuwhpsrudo khgjlqj ghpdqg iru erqgv lq +8159, lv dozd|v srvlwlyh
zkhq A 41
Wkh dssur{lpdwh orjolqhdu vroxwlrq zloo eh dffxudwh surylghg wkdw wkh
orj frqvxpswlrq0zhdowk udwlr lv qrw wrr yduldeoh durxqg lwv xqfrqglwlrqdo
phdq1 Ri frxuvh/ lw lv h{dfw lq wkrvh vshfldo fdvhv lq zklfk wkh rswlpdo
frqvxpswlrq udwlr lv frqvwdqw1 Zlwk wlph0ydu|lqj lqyhvwphqw rssruwxqlwlhv
dqg srzhu xwlolw|/ wkh rqo| vshfldo fdvh lv @ 41 Nrjdq dqg Xssdo +5333,
kdyh vxjjhvwhg dq dowhuqdwlyh dssur{lpdwh dqdo|wlfdo vroxwlrq durxqg wkh
h{dfw vroxwlrq wkdw rewdlqv zkhq @ 41e Wklv vroxwlrq zrunv e| vxevwlwxwlqj
wkh jxhvv iru wkh ydoxh ixqfwlrq +814<, lqwr wkh uvw rughu frqglwlrqv +814:,
dqg +814;, dqg h{sdqglqj wkh uhvxowlqj h{suhvvlrqv durxqg @ 41
Wklv dowhuqdwlyh vroxwlrq lv d sduwlfxodu fdvh ri wkh orjolqhdu vroxwlrq
surfhgxuh wkdw vhwv H^f| z| ` @ orj / wkh h{dfw ydoxh ri wklv h{shfwdwlrq
zkhq @ 41 Wr vhh wklv lq rxu h{dpsoh/ qrwh wkdw vxevwlwxwlrq ri jxhvv
+814<, lqwr wkh uvw0rughu frqglwlrq iru frqvxpswlrq +814:, ohdgv wr htxdwlrq
+8154,1 H{sdqglqj wklv htxdwlrq durxqg @ 4 zh rewdlq=
F|
@ h{s ik +u| ,j
Z|
h{s ikj h{s ikj +k +u| , k,m'3 *L} q
@ +4 orj , . +k +u| ,, > +815:,
zkhuh k+u| , @ orj K+u| , dqg k @ orj lv wkh nqrzq/ h{dfw ydoxh ri wkh
ixqfwlrq k+u| , zkhq @ 41
Gluhfw frpsdulvrq ri +8155, dqg +815:, vkrzv wkdw wkh dowhuqdwlyh ds0
sur{lpdwh vroxwlrq lv d sduwlfxodu fdvh ri wkh orjolqhdu vroxwlrq edvhg rq
+8155,/ zlwk k @ 1D Lw lv dovr vwudljkwiruzdug wr fkhfn wkdw vxevwlwxwlrq

iU@ti |i 4@h}?@* |*|) Lu UL?t4T|L? @TThL@Uit n" @t UL?t4T|L? @T
ThL@Uit 3ihLc |i ?it|Lh ** LT|4@**) ULLti TLh|uL*L @?_ UL?t4T|L?t@?} h*it
|L i?thi t|hU|*) TLt|i UL?t4T|L? ?i | TihL_ At 4T*it |@| i 4t| @i
`|n : f @?_ `| : | i@U TihL_
e
@U!L @?_ VUih@ Ebbbc TTi?_ @i @*tL t}}it|i_ @ t4*@h tL*|L? @TThL@U
? @ 4L_i* | |i UL?|?Lt|4i @?@*L}i Lu |i ,Tt|i?~? |*|) u?U|L? Ai)
tL |@| i U@? LM|@? i @U| tL*|L?t |L |i ?|ih|i4TLh@* LT|43@|L? ThLM*i4 M)
UL?t|h@??} |i ?|ih|i4TLh@* i*@t|U|) Lu tMt|||L? E |L L?ic M| *i@?} |i UL
iUi?| Lu hi*@|i ht! @ihtL? E ?UL?t|h@?i_c @?_ t}}it| |L ?_ @? @TThL 4@|i
tL*|L? @hL?_ |t i @U| tL*|L? ì tL |t i @U| tL*|L? ? 5iU|L? D
D
L|i |@| 3Eo| ' S| 3 |
449
WLPH
ri +815:, lqwr wkh Ehoopdq htxdwlrq +8153, ohdgv wr dq rswlpdo sruwirolr uxoh
wkdw lv lghqwlfdo wr +8159,/ zlwk k @ 1
Wkh dssur{lpdwh dqdo|wlfdo vroxwlrq durxqg @ 4 lv ixoo| dqdo|wlfdo lq
wkh vhqvh wkdw lw vlpso| vhwv k htxdo wr wkh glvfrxqw idfwru / vr wkdw qr
qxphulfdo surfhgxuh lv qhfhvvdu| wr qg k 1 Fkdfnr dqg Ylfhlud +4<<<, dqg
Nrjdq dqg Xssdo +5333, qrwh wkdw wklv vroxwlrq zloo eh dffxudwh iru ydoxhv ri
forvh wr rqh1 Rxu lqwhusuhwdwlrq ri wklv dowhuqdwlyh vroxwlrq dv d sduwlfxodu
fdvh ri wkh orjolqhdu vroxwlrq vxjjhvwv wkdw lw zloo dovr eh dffxudwh iru ydoxhv
ri ixuwkhu dzd| iurp 4 surylghg wkdw wkh phdq orj rswlpdo frqvxpswlrq0
zhdowk udwlr lv qrw idu iurp orj 1 Krzhyhu/ wklv lv xqolnho| wr eh wkh fdvh1
Fdpsehoo dqg Ylfhlud +4<<</ 5334, kdyh vkrzq wkdw wkh hpslulfdo prghov
suhvhqwhg lq Fkdswhuv 6 dqg 7 lpso| rswlpdo phdq orj rswlpdo frqvxpswlrq0
zhdowk udwlrv wkdw ydu| juhdwo| dv d ixqfwlrq ri 1 Wklv vxjjhvwv wkdw vlpso|
vhwwlqj wkh orjolqhdul}dwlrq sdudphwhu k wr pljkw gholyhu ohvv dffxudwh
vroxwlrqv wkdq xvlqj d vlpsoh qxphulfdo uhfxuvlrq wr qg k 1 Fdpsehoo
+4<<6, rhuv vrph hylghqfh wkdw vxssruwv wklv frqmhfwxuh lq d prgho zkhuh
wkhuh lv rqo| rqh dvvhw/ dqg wkh lqglylgxdo*v rqo| fkrlfh lv frqvxpswlrq1
Kh vroyhv iru rswlpdo frqvxpswlrq xvlqj qxphulfdo phwkrgv/ wkh orjolqhdu
dssur{lpdwlrq phkwrg dqg wkh dssur{lpdwlrq wkdw vhwv k @ / dqg qgv
wkdw wkh dssur{lpdwlrq huuru surgxfhg e| vhwwlqj k @ fdq eh pdq| wlphv
odujhu wkdq wkh huuru surgxfhg e| wkh orjolqhdu phwkrg/ hyhq iru ydoxhv ri
dv forvh wr orj xwlolw| dv 318 ru 51
D2 Ai L O@?} TThL@U

Fr{ dqg Kxdqj +4<;<, kdyh vxjjhvwhg dq dowhuqdwlyh dssurdfk wr lqwhuwhp0
srudo frqvxpswlrq dqg sruwirolr fkrlfh wkdw wdnhv dgydqwdjh ri wkh surshu0
wlhv ri wkh vwrfkdvwlf glvfrxqw idfwru xqghu frpsohwh pdunhwv1 Wklv dssurdfk
zrunv e| wudqviruplqj g|qdplf sureohpv lqwr d vwdwlf sureohp zkrvh xq0
nqrzq lv rswlpdoo| lqyhvwhg zhdowk udwkhu wkdq wkh ydoxh ixqfwlrq1 Wklv
wudqvirupdwlrq gholyhuv d glhuhqwldo htxdwlrq iru rswlpdoo| lqyhvwhg zhdowk
wkdw lv riwhq hdvlhu wr vroyh wkdq wkh Ehoopdq htxdwlrq iru wkh ydoxh ixqf0
wlrq1 Lq wklv vhfwlrq zh rhu d _kdqgv0rq% h{sodqdwlrq ri krz wklv dssurdfk
zrunv1 Zh vwduw e| ghvfulelqj wkh surshuwlhv ri wkh vwrfkdvwlf glvfrxqw idfwru
lq frqwlqxrxv wlph1
D2 Ai t|LU@t|U _tUL?| u@U|Lh ? UL?|?Lt |4i

Wkh vwrfkdvwlf glvfrxqw idfwru lq frqwlqxrxv wlph lv ghqhg dv wkh surfhvv
P| vxfk wkdw iru dq| vhfxulw| zlwk sulfh Y| dqg lqvwdqwdqhrxv sd|r [r zh
44:
WLPH
kdyh=
Pr
Y| @ H| [r > v w= +815;,
P|
Wkh vwrfkdvwlf glvfrxqw idfwru lv dovr nqrzq dv wkh sulflqj nhuqho ru vwdwh0
sulfh ghqvlw|1 Dq lpsruwdqw surshuw| ri wkh frqwlqxrxv0wlph vwrfkdvwlf glv0
frxqw idfwru lv wkdw lw lv xqltxh li pdunhwv duh frpsohwh dqg wkhuh duh qr
rssruwxqlwlhv iru duelwudjh lq wkh hfrqrp|1
Li zh duh frqvlghulqj d vhfxulw| wkdw grhv qrw sd| glylghqgv/ zh kdyh
[r @ Y7 / dqg +815;, ehfrphv
P| Y| @ H| ^Pr Yr ` > +815<,
zklfk lq wxuq lpsolhv wkdw P| Y| iroorzv d pduwlqjdoh=
H| ^g +P| Y| ,` @ 3= +8163,
Li wkh vhfxulw| sd|v dq lqvwdqwdqhrxv glylghqg ri G| gw hdfk shulrg/ zh kdyh

[r @ Yr . Gr gw/ dqg +815;, ehfrphv
H| ^g +P| Y| , . P| G| gw` @ 3= +8164,
Zh fdq vwloo xvh htxdwlrq +8163, wr dqdo|}h d vhfxulw| wkdw sd|v glylghqgv/
surylghg wkdw zh lqwhusuhw Y| dv dq lqgh{ zkrvh lqvwdqwdqhrxv udwh ri fkdqjh
htxdov wkh wrwdo uhwxuq rq wkh vhfxulw|1
Jlyhq d surfhvv iru wkh vwrfkdvwlf glvfrxqw idfwru/ zh fdq sulfh dq|
vhfxulw| lq wkh pdunhw1 Kduulvrq dqg Nuhsv +4<:<, vkrz wkdw zh fdq dovr
zrun wkh rwkhu zd| durxqg/ dqg qg wkh vwrfkdvwlf glvfrxqw idfwru wkdw lv
frqvlvwhqw zlwk d vhw ri revhuyhg htxloleulxp sulfhv lq wkh hfrqrp|1 Iru
h{dpsoh/ vxssrvh wkdw wkh rqo| vhfxulwlhv lq wkh pdunhw duh vhfxulw| S| /
zkrvh wrwdo uhwxuq iroorzv wkh surfhvv +814,/ dqg dq lqvwdqwdqhrxvo| ulvnohvv
dvvhw jlyhq lq +815,1 Ixuwkhu/ dvvxph wkdw pdunhwv duh frpsohwh/ l1h1/ wkdw wkh
yhfwru ri wudghg vhfxulw| sulfhv shuihfwo| vsdqv wkh yhfwru ri vwdwh yduldeohv1
Lq rxu h{dpsoh/ wkh frpsohwh0pdunhwv dvvxpswlrq phdqv wkdw lqqryd0
wlrqv wr wkh vwdwh yduldeoh dqg lqqrydwlrqv wr wkh ulvn| dvvhw uhwxuq pxvw
eh shuihfwo| fruuhodwhg vr wkdw wkhuh lv rqo| rqh vrxufh ri xqfhuwdlqw| lq
wkh prgho +l1h1/ g]c| @ g]7c| ,1 Lq wklv fdvh/ wkh vwrfkdvwlf glvfrxqw idfwru
iroorzv d glxvlrq surfhvv zlwk rqo| rqh glxvlrq whup=
gP|
@ +V> w, gw . +V> w, g]c| 1 +8165,
P|
Zh fdq xvh wkh pduwlqjdoh surshuw| +8163, wr vroyh iru dqg dv ixqf0
wlrqv ri wkh guliw dqg glxvlrq frhflhqwv ri vhfxulw| sulfhv1 Htxdwlrq +8163,
44;
WLPH
lpsolhv wkdw H| ^g+P| S| ,` @ 3 dqg H| ^g+P| E| ,` @ 31 Wkdw lv/ wkh guliw whupv
ri g+P| S| , dqg g+P| E| , pxvw eh htxdo wr }hur1 Iurp Lwa r*v Ohppd zh kdyh
g +P| S| , @ P| S| +gS| . gP| . gw, +8166,

@ P| S| ^+ . . , gw . + . , g]c| ` =
Wkxv wkh pduwlqjdoh surshuw| H| ^g+P| S| ,` @ 3 krogv li dqg rqo| li
. . @ 3= +8167,
Vlploduo|/ iru wkh lqvwdqwdqhrxvo| ulvnohvv erqg zh kdyh
g +P| E| , @ P| E| +gE| . gP| , +8168,

@ P| E| ^+u . , gw . g]c| ` >
dqg wkh pduwlqjdoh surshuw| uhtxluhv
u . @ 3= +8169,
Htxdwlrqv +8167, dqg +8169, ghqh d v|vwhp ri wzr olqhdu htxdwlrqv zlwk wzr
xqnqrzqv/ zkrvh xqltxh vroxwlrq lv
+V> w, @ u +V> w, > +816:,

+V> w, u +V> w,
+V> w, @ = +816;,
+V> w,
Wkdw lv/ wkh lqvwdqwdqhrxv h{shfwhg uhwxuq rq wkh vwrfkdvwlf glvfrxqw idfwru
lv wkh qhjdwlyh ri wkh lqvwdqwdqhrxv lqwhuhvw udwh/ dqg wkh glxvlrq whup lv wkh
qhjdwlyh ri wkh sulfh ri ulvn +ru Vkdush udwlr ri wkh ulvn| dvvhw,1 Qrwh wkdw li
pdunhwv duh qrw frpsohwh/ wkh lqqrydwlrqv wr wkh glvfrxqw idfwru zloo ghshqg
rq erwk g]c| dqg g]7c| / dqg lw zloo qrw eh srvvleoh wr xqltxho| lghqwli| wkh
guliw dqg glxvlrq whupv ri wkh surfhvv iru wkh vwrfkdvwlf glvfrxqw idfwru1
Lw lv vwudljkwiruzdug wr h{whqg wklv dssurdfk wr dq| qxpehu ri vhfxulwlhv1
Lq wklv fdvh/ gS| @S| ehfrphv d yhfwru/ dqg c| d yhfwru vxfk wkdw c| c| @
c| / zkhuh c| lv wkh lqvwdqwdqhrxv yduldqfh0fryduldqfh pdwul{ ri uhwxuqv1
D22 Nt?} |i t|LU@t|U _tUL?| u@U|Lh |L tL*i TLh|uL*L

@?_ UL?t4T|L? ThLM*i4t
Wudqviruplqj wkh g|qdplf sureohp lqwr d vwdwlf sureohp
44<
WLPH
Wkh Fr{0Kxdqj vroxwlrq dssurdfk xvhv wkh surshuwlhv ri wkh vwrfkdvwlf
glvfrxqw idfwru xqghu frpsohwh pdunhwv wr vroyh sruwirolr dqg frqvxpswlrq
sureohpv1 Zh kdyh ghqhg wkh rswlpdo sruwirolr dqg frqvxpswlrq sureohp
iru d orqj0whup lqyhvwru lq vhfwlrq 81414 dv
] "
pd{ Hf X +F> w, gw > +816<,
ck f
vxemhfw wr
gZ @ ^+ + u, . u, Z F` gw . Z g] > +8173,
dqg srvlwlyh lqlwldo zhdowk Zf A 31 Qrwh wkdw e| vlpso| uhrughulqj whupv

zh fdq uhzulwh wkh lqwhuwhpsrudo exgjhw frqvwudlqw dv=
gZ . Fgw
@ ^ . +4 , u` gw . g] = +8174,
Z
Wklv h{suhvvlrq lqwhusuhwv wkh g|qdplf exgjhw frqvwudlqw +8173, dv wkh wrwdo
uhwxuq rq dq dvvhw zkrvh sulfh lv Z| dqg wkdw kdv dq lqvwdqwdqhrxv glylghqg
hdfk shulrg htxdo wr rswlpdo frqvxpswlrq F| 1 Xqghu wklv lqwhusuhwdwlrq/
rswlpdoo| lqyhvwhg zhdowk Z| pxvw yhuli|
] "
Pr
Z| @ H| Fr gv = +8175,
| P|
Wkdw lv/ rswlpdoo| lqyhvwhg zhdowk lv wkh h{shfwhg suhvhqw ydoxh ri rswl0
pdo ixwxuh frqvxpswlrq glvfrxqwhg xvlqj wkh vwrfkdvwlf glvfrxqw idfwru1
Rswlpdoo| lqyhvwhg zhdowk dw dq| wlph pxvw eh deoh wr qdqfh h{shfwhg
frqvxpswlrq xqghu wkh rswlpdo frqvxpswlrq sodq ghwhuplqhg dw w1
Zlwk wklv uhlqwhusuhwdwlrq ri wkh exgjhw frqvwudlqw/ zh fdq wudqvirup
wkh g|qdplf rswlpl}dwlrq sureohp +816<,0+8173, lqwr wkh iroorzlqj sureohp=
] "
pd{ Hf X +F> w, gw +8176,
f
vxemhfw wr ]
"
P|
Zf @ Hf F| gw > +8177,
f Pf
zkhuh zh rplw iurp wkh dujxphqw ri wkh pd{ rshudwru ehfdxvh zh dvvxph
wkdw Zf dqg F| lq +8177, ghqrwh rswlpdoo| lqyhvwhg zhdowk dqg rswlpdo
frqvxpswlrq uhvshfwlyho|1 Fr{ dqg Kxdqj +4<;<, vkrz wkdw wkh vroxwlrq
wr wklv sureohp lv htxlydohqw wr wkh vroxwlrq wr sureohp +816<,0+8173,1 Dw
453
WLPH
wkh vdph wlph/ +8176,0+8177, lv d vwdwlf sureohp wkdw zh fdq vroyh xvlqj wkh
vwdqgdug Odjudqjldq phwkrg1
Wkh uvw0rughu frqglwlrqv iru wkh vwdwlf sureohp +8176,0+8177, duh
X +F| , @ c P| @, F| @ X3 +c P| , > +8178,
zkhuh c ghqrwhv wkh Odjudqjh pxowlsolhu/ dqg +8177,wkdw lv/ wkh exgjhw
frqvwudlqw pxvw krog dorqj wkh rswlpdo sdwk1 Qrwh wkdw c grhv qrw kdyh d
wlph vxevfulsw> lw lv d frqvwdqw ghwhuplqhg dw wlph 31 Vxevwlwxwlqj +8178,
lqwr +8177, zh kdyh
] "
3 P|
Zf @ Hf X +c P| , gw = +8179,
f Pf
Zh fdq vlpsoli| wklv h{suhvvlrq e| ghqlqj d qhz yduldeoh
[| @ +cP| ,3 = +817:,
Wklv ghqlwlrq lpsolhv wkdw P| @Pf @ [f @[| 1 Lw dovr lpsolhv wkh iroorzlqj
g|qdplfv iru [| =

g[| gP| gP| 2
@ .
[| P| P|

@ +V> w, . 2 +V> w, gw +V> w, g]c| > +817;,
zkhuh wkh uvw olqh iroorzv iurp Lwa r*v Ohppd/ dqg wkh vhfrqg olqh iroorzv
iurp +8165,/ +816:, dqg +816;,1 Fr{ dqg Kxdqj +4<;<, jlyh dq lqwhuhvwlqj
lqwhusuhwdwlrq ri wkh yduldeoh [| / qrwlqj wkdw lw lv wkh ydoxh ri wkh _jurzwk0
rswlpdo sruwirolr1% Zh vkrzhg lq vhfwlrq 51416 wkdw wklv lv wkh sruwirolr wkdw
pd{lpl}hv wkh orj uhwxuq rq zhdowk/ dqg lw lv wkh rswlpdo sruwirolr iru dq
lqyhvwru zlwk orj xwlolw| ryhu whuplqdo zhdowk1S
Vxevwlwxwlqj edfn lqwr +8179, dqg qrwlqj wkdw +8179, pxvw krog dw doo
wlphv/ zh rewdlq wkh iroorzlqj htxdolw| iru rswlpdoo| lqyhvwhg zhdowk=
] "
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Z| @ H| X3 [r3 gv +817<,
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||L? Lu |t h*i ?|L EDDQ| | ' fQ}it EDeH
454
WLPH
Jlyhq wkh Pdunryldq vwuxfwxuh ri wkh g|qdplfv iru [| dqg V| +vhh ^816` dqg
^817;`,/ wklv h{shfwdwlrq zloo eh vrph ixqfwlrq I ri wkh fxuuhqw ydoxh ri [1
Li wkh surfhvv iru [| ghshqgv rq wkh vwdwh yduldeoh/ lw zloo eh dovr d ixqfwlrq
ri wkh fxuuhqw ydoxh ri V=
Z| @ I +[> V> w, = +8183,
Wklv revhuydwlrq kdv lpsruwdqw lpsolfdwlrqv iru wkh uroh ri wlph0ydu|lqj

h{shfwhg uhwxuqv/ yduldqfhv dqg fryduldqfhv rq sruwirolr fkrlfh1 Qrwh wkdw
wkh surfhvv iru [ ghshqgv rqo| rq wkh lqvwdqwdqhrxv lqwhuhvw udwh/ @ u/
dqg rq wkh sulfh ri ulvn/ @ + u,@ / exw lw grhv qrw ghshqg rq wkh
h{shfwhg uhwxuq rq wkh ulvn| dvvhw ru lwv lqvwdqwdqhrxv vwdqgdug ghyldwlrq
lq lvrodwlrq1 Wkxv/ li erwk wkh lqvwdqwdqhrxv lqwhuhvw udwh dqg wkh sulfh
ri ulvn duh frqvwdqw/ rswlpdoo| lqyhvwhg zhdowk zloo qrw ghshqg rq V/ hyhq
li dqg duh ixqfwlrqv ri V lqglylgxdoo|1 Rswlpdo sruwirolr fkrlfh dqg
frqvxpswlrq zloo eh dovr lqghshqghqw ri wkh surfhvv iru wkh vwdwh yduldeoh/
ehfdxvh wkh| ghshqg rq wkh vwdwh yduldeoh rqo| lqgluhfwo| wkurxjk rswlpdoo|
lqyhvwhg zhdowk1
Qlhovhq dqg Ydvvdorx +5333, vkrz wkdw wklv uhvxow krogv jhqhudoo|/ uh0
jdugohvv ri wkh glphqvlrqv ri wkh vwdwh yhfwru dqg wkh yhfwru ri ulvn| dvvhwv/
dqg uhjdugohvv ri zkhwkhu pdunhwv duh frpsohwh ru qrw1 Wkh| qrwh wkdw wkh
lqwhuhvw udwh lv wkh lqwhufhsw ri wkh lqvwdqwdqhrxv fdslwdo pdunhw olqh/ dqg
wkh sulfh ri ulvn +ru Vkdush udwlr, lv wkh vorsh1 Wkhlu uhvxow lpsolhv wkdw
wkh rqo| wlph yduldwlrq wkdw pdwwhuv iru frqvxpswlrq dqg sruwirolr fkrlfh lv
wlph0yduldwlrq lq wkh vorsh dqg lqwhufhsw ri wkh lqvwdqwdqhrxv fdslwdo pdunhw
olqh1
Vroylqj iru rswlpdoo| lqyhvwhg zhdowk
Zh fdq xvh wkh pduwlqjdoh surshuw| +8163, wr vroyh iru wkh ixqfwlrq
I +[> V> w,1 Wkh pduwlqjdoh surshuw| lpsolhv
3
3
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zkhuh wkh vhfrqg whup rq wkh uljkw0kdqg vlgh frphv iurp wkh idfw wkdw
rswlpdoo| lqyhvwhg zhdowk sd|v dq lqvwdqwdqhrxv _glylghqg% htxdo wr F| gw1
Zh qrz vkrz wkdw wkh h{shfwdwlrq +8184, lpsolhv d vhfrqg0rughu sduwldo
glhuhqwldo htxdwlrq +SGH, iru rswlpdoo| lqyhvwhg zhdowk1
Wr frpsxwh wkh h{shfwdwlrq +8184,/ zh qhhg uvw wr frpsxwh g+P| I| ,1
E| Lwar*v Ohppd/ zh kdyh wkdw
g+P| I| , @ I| gP| . P| gI| . gP| gI| = +8185,
455
WLPH
Zh kdyh douhdg| ghulyhg wkh g|qdplfv iru gP| lq +8165,1 Zh fdq rewdlq wkh
g|qdplfv iru gI e| xvlqj Lwar*v Ohppd rqfh djdlq=
4 4
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5 5
+8186,
zkhuh vxelqglfhv ghqrwh sduwldo ghulydwlyhviru h{dpsoh/ I7 @ CI@CV
zlwk wkh h{fhswlrq wkdw zh zulwh CI@Cw udwkhu wkdq I| wr dyrlg dq| frqixvlrq
zlwk wkh ydoxh ri wkh ixqfwlrq I dw wlph w1
Gluhfw vxevwlwxwlrq ri htxdwlrqv +8185, dqg +8186, lq +8184, lpsolhv wkdw
wkh dujxphqw ri wkh h{shfwdwlrq iroorzv dq Lwar surfhvv1 Wkxv wkh h{shfwdwlrq
lq +8184, lv }hur rqo| li wkh guliw ri wklv surfhvv lv }hur1 Vhwwlqj wkh guliw
wr }hur/ zh rewdlq d vhfrqg0rughu sduwldo glhuhqwldo htxdwlrq +SGH, iru
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X3 [ 3 . u . 2 [If . 7 I7 . CI@Cw uI
4 4
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5
2 5
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zlwk erxqgdu| frqglwlrq
olp Hf Î +[> V> w,` @ 3= +8188,

|<"
Vroylqj iru rswlpdo frqvxpswlrq dqg sruwirolr fkrlfh
Rqfh zh kdyh vroyhg iru rswlpdoo| lqyhvwhg zhdowk Z| I +[> V> w,/ zh
fdq hdvlo| vroyh iru frqvxpswlrq dqg sruwirolr fkrlfh1 Wr vroyh iru frqvxps0
wlrq/ zh xvh wkh uvw rughu frqglwlrq +8178,=

3 4
F| @ X
[|

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I 3 +Z> V> w,
zkhuh zh kdyh dvvxphg wkdw I +[> V> w, lv lqyhuwleoh/ vr Z| I +[> V> w, @,

[| @ I 3 +Z> V> w,1
Wr vroyh iru rswlpdo sruwirolr fkrlfh/ zh vlpso| htxdwh wkh glxvlrq whupv
ri wkh lqwhuwhpsrudo exgjhw frqvwudlqw +818, dqg wkh htxdwlrq ghvfulelqj wkh
456
WLPH
g|qdplfv ri rswlpdoo| lqyhvwhg zhdowk +8186,/ vlqfh erwk pxvw eh wkh vdph
dorqj wkh rswlpdo sdwk=
I g]c| @ If [ g]c| . I7 7 g]7c| +818:,

u
@ If [g]c| . I7 7 g]7c| =

Wklv htxdwlrq kljkoljkwv wkh lpsruwdqfh ri d frpsohwh0pdunhwv dvvxps0
wlrq lq wkh Fr{0Kxdqj dssurdfk1 Wkh ohiw0kdqg vlgh ri wklv htxdwlrq ghshqgv
rqo| rq g]c| / exw wkh uljkw0kdqg vlgh ghshqgv rq erwk g]c| dqg g]7c| 1 Wr
lghqwli| zh qhhg hlwkhu wkdw I7 @ 3/ ru wkh frpsohwh0pdunhwv dvvxpswlrq
wkdw g]c| dqg g]7c| duh shuihfwo| fruuhodwhg vr wkdw g]7c| @ g]c| 1 Vlqfh
I7 qhhg qrw eh }hur lq jhqhudo/ vroylqj iru uhtxluhv wkdw zh dvvxph wkdw
pdunhwv duh frpsohwh1 Xqghu wklv dvvxpswlrq/ wkh rswlpdo sruwirolr uxoh lv

If [ +V> w, u +V> w, I7 7 +V> w,
@ . = +818;,
I 2 +V> w, I +V> w,
E| dqdorj| zlwk htxdwlrq +8144, zlwk 7c +V> w, @ 4/ zh fdq hdvlo| lghq0
wli| wkh uvw frpsrqhqw ri htxdwlrq +818;, zlwk wkh p|rslf frpsrqhqw ri wkh
rswlpdo sruwirolr uxoh/ dqg wkh vhfrqg frpsrqhqw zlwk wkh khgjlqj frpsr0
qhqw1 Dv Fr{ dqg Kxdqj +4<;<, qrwh/ htxdwlrqv +8144, dqg +818;, dovr doorz
xv wr uhodwh wkh g|qdplf surjudpplqj dssurdfk dqg wkh Fr{0Kxdqj ds0
surdfk1 Gluhfw frpsdulvrq ri wkhvh htxdwlrqv vkrzv wkdw wkh ydoxh ixqfwlrq
dqg rswlpdoo| lqyhvwhg zhdowk yhuli| wkh iroorzlqj lghqwlwlhv=
M` M` 7
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M` ` M` `
D2 h i @4T*i hit|i_

Zh fdq hdvlo| dsso| wkhvh uhvxowv wr wkh h{dpsoh ri rswlpdo sruwirolr fkrlfh
zlwk wlph0ydu|lqj lqwhuhvw udwhv dqg srzhu xwlolw| jlyhq lq vhfwlrq 814151
Iluvw/ qrwh wkdw wkh g|qdplfv iru wkh lqvwdqwdqhrxv lqwhuhvw udwh dqg wkh
uhwxuq rq d orqj0whup erqg lpso| wkh iroorzlqj surfhvv iru wkh vwrfkdvwlf
glvfrxqw idfwru=
gP|
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P| o
Wklv surfhvv lpsolhv wkdw g[| @[| @ +u . 2 @2o ,gw @o g]o dqg g[| gV|
g[| gu| @ gw1 Zlwk srzhu xwlolw| ghqhg ryhu frqvxpswlrq/ X+F| , @
h3q| F|3 @+4 ,1 Wkxv
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457
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Vxevwlwxwlqj wkhvh uhvxowv lqwr +8187, zh rewdlq=
3 @ h3q|* [ * uI . u[If . +o +o u, . , Io . CI@Cw

4 2 4
. 2 [ 2 Iff . 2o Ioo [Ifoc +8195,
5 o 5
vxemhfw wr wkh erxqgdu| frqglwlrq olp|<" Hf Î +[> u> w,` @ 3=

Zdfkwhu +4<<<, vkrzv wkdw wklv htxdwlrq kdv d vroxwlrq ri wkh irup
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dqg D+v, lv d ixqfwlrq ri v1 Zdfkwhu +4<<;, qrwhv wkdw wkh olplw ri wkh ixqf0
wlrq +u| > v, dv $ 4 lv wkh sulfh ri d }hur0frxsrq erqg zlwk pdwxulw| v
wkdw sd|v rqh xqlw ri frqvxpswlrq dw pdwxulw|= olp<" +u| > v, @ S +u> v, @
h{sie+v,u| . D+v,j1 Wklv kdv lpsruwdqw lpsolfdwlrqv iru wkh lqwhusuhwdwlrq
ri wkh rswlpdo frqvxpswlrq dqg sruwirolr uxohv1
Wkh rswlpdo uxohv fdq eh irxqg e| gluhfw vxevwlwxwlrq ri I +[> u> w, lqwr
+8189, dqg +818;,1 Wkh rswlpdo frqvxpswlrq uxoh lv
] 3| 3
F X3 [ 3
@ @ olp +u| > v, gv = +8198,
Z I <" f
Vlqfh olp<" +u| > v, lv wkh sulfh ri d }hur frxsrq erqg zlwk pdwxulw| v/
wkh olplw dv $ 4/ ri wkh lqwhjudo h{suhvvlrq lq +8198, pxvw eh wkh sulfh
ri d frxsrq erqg zlwk pdwxulw| 1 Wkhuhiruh/ dv $ 4 dqg $ 4/ wklv
h{suhvvlrq frqyhujhv wr wkh sulfh ri d uhdo frqvro erqg wkdw sd|v rqh xqlw ri
frqvxpswlrq hdfk shulrg1 Rswlpdoo| lqyhvwhg zhdowk iru dq lqqlwho| ulvn
dyhuvh lqyhvwru lv htxdo wr wkh ydoxh ri d uhdo frqvro erqg wkdw sd|v F xqlwv
ri frqvxpswlrq hdfk shulrg1
Iru dq lqyhvwru zkr lv qrw lqqlwho| ulvn dyhuvh/ d vlplodu lqwhusuhwdwlrq
lv vwloo srvvleoh1 Zdfkwhu +4<<;, vkrzv wkdw +u| > v, lv wkh fxuuhqw ydoxh ri
rqh xqlw ri frqvxpswlrq v shulrgv dkhdg iru dq lqyhvwru zlwk uhodwlyh ulvn
dyhuvlrq frhflhqw zkr lv pd{lpl}lqj xwlolw| ryhu frqvxpswlrq v shulrgv
dkhdg1 Wkhuhiruh/ wkh lqwhjudo h{suhvvlrq lq +8198, lv wkh ydoxh iru wklv
lqyhvwru ri rqh xqlw ri frqvxpswlrq shu shulrg lq wkh ixwxuh1
458
WLPH
Wkh rswlpdo sruwirolr doorfdwlrq wr orqj0whup erqgv lv
[If Io 4
@ 2
+8199,
I o e +W w, I e +W w,
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e +W w, o e +W w, <" +u| > v, gv
f
zkhuh wkh uvw whup ri lv wkh p|rslf ghpdqg iru orqj0whup erqgv dqg
wkh vhfrqg whup lvU wkh lqwhuwhpsrudo khgjlqj frpsrqhqw1 Jlyhq rxu hduolhu
3|
lqwhusuhwdwlrq ri f +u| > v,/ lw lv hdv| wr vhh wkdw wkh udwlr ri lqwhjudov
lq wkh lqwhuwhpsrudo khgjlqj frpsrqhqw phdvxuhv wkh prglhg gxudwlrq ri
rswlpdo frqvxpswlrq1 Zdfkwhu +4<<;, vkrzv wkdw dv $ 4/ frqyhujhv
wr d srvlwlrq lq wkh dydlodeoh }hur0frxsrq erqg wkdw/ lq frpelqdwlrq zlwk
wkh lqvwdqwdqhrxvo| ulvnohvv dvvhw/ uhsolfdwhv wkh sd|phqwv rq d uhdo frqvro
erqg1
Htxdwlrq +8196, zulwhv wkh vroxwlrq ri wkh SGH +8195, lq lqwhjudo irup1
Wr hydoxdwh wklv ixqfwlrq/ lw zrxog eh qhfhvvdu| wr gr qxphulfdo lqwhjudwlrq1
Krzhyhu/ lw lv srvvleoh wr qg dq dssur{lpdwh dqdo|wlfdo vroxwlrq wr wklv
SGH wkdw grhv qrw uhtxluh qxphulfdo lqwhjudwlrq1 Wklv vroxwlrq lv lghqwlfdo
wr wkh vroxwlrq zh rewdlqhg xvlqj g|qdplf surjudpplqj1 Wr vhh wklv/ qrwh
wkdw wkh uvw whup ri htxdwlrq +8195, lv vlpso| wkh frqvxpswlrq0zhdowk udwlr1
Wkxv zh fdq dssur{lpdwh wklv udwlr xvlqj wkh vdph orj0olqhdu dssur{lpdwlrq
dv lq vhfwlrq 814161 Iluvw/ zh vxevwlwxwh kf . k +f| i| , iru wkh uvw whup lq
wkh htxdwlrq1 Qh{w/ zh jxhvv wkdw

I +[> u> w, @ h3q|* [| h{s iFf . F u| j > +819:,
dqg zh xvh wklv jxhvv wr frpsxwh doo wkh h{suhvvlrqv lq wkh SGH +8195,
lqyroylqj I ru lwv ghulydwlyhv1 Zh dovr qrwh wkdw wklv jxhvv lpsolhv f| i| @
Ff F u| 1 Lw lv vwudljkwiruzdug wr vhh wkdw vxevwlwxwlrq ri wkh jxhvv lqwr
wkh dssur{lpdwhg SGH ohdgv wr wkh vdph dssur{lpdwh dqdo|wlfdo vroxwlrq
iru wkh rswlpdo sruwirolr srolf| dqg wkh rswlpdo frqvxpswlrq0zhdowk udwlr
wkdw zh rewdlqhg ehiruh lq htxdwlrqv +8158, dqg +8159,1
D +iUhti N|*|) ? L?|?Lt A4i

Lq Fkdswhu 5 zh lqwurgxfhg uhfxuvlyh Hsvwhlq0]lq suhihuhqfhv dv d zd| wr
jhqhudol}h wkh vwdqgdug/ wlph0vhsdudeoh srzhu xwlolw| prgho wr vhsdudwh uho0
dwlyh ulvn dyhuvlrq iurp wkh hodvwlflw| ri lqwhuwhpsrudo vxevwlwxwlrq ri frq0
vxpswlrq1 Vyhqvvrq +4<;<,/ Gxh dqg Hsvwhlq +4<<5d/ 4<<5e,/ dqg Ilvkhu
459
WLPH
dqg Jloohv +4<<;, ghulyh d frqwlqxrxv0wlph dqdorjxh ri wkh Hsvwhlq0]lq xwlo0
lw| ixqfwlrq1 Zh dgrsw wkh Gxh dqg Hsvwhlq +4<<5e, sdudphwhul}dwlrq ri
uhfxuvlyh xwlolw|= ]
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|
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wlqxdwlrq xwlolw| wkdw wdnhv wkh irup
5# $3 6

7 F
i +F> M, @ +4 , M 48 = +819<,
4 ++4 , M, !
Khuh A 3 lv wkh udwh ri wlph suhihuhqfh/ A 3 lv wkh frhflhqw ri uhodwlyh

ulvn dyhuvlrq/ dqg # A 3 lv wkh hodvwlflw| ri lqwhuwhpsrudo vxevwlwxwlrq1 Srzhu
xwlolw| rewdlqv iurp +819<, e| vhwwlqj # @ 4@1
Wkh qrupdol}hg djjuhjdwru i +F> M, wdnhv wkh iroorzlqj irup zkhq # $ 4=

4
i +F> M, @ +4 , M orj +F, orj ++4 , M, = +81:3,
4
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wlpdolw| dssolhv wr uhfxuvlyh xwlolw|1 Iurp d frpsxwdwlrqdo shuvshfwlyh/ wkh
rqo| glhuhqfh iurp wkh vwdqgdug dgglwlyh xwlolw| fdvh lv wkdw zh qhhg wr
vxevwlwxwh wkh qrupdol}hg djjuhjdwru i +F> M, iru wkh lqvwdqwdqhrxv xwlolw|
ixqfwlrq X+F, lq wkh Ehoopdq htxdwlrq +819,1
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xqghu uhfxuvlyh xwlolw|1 Wklv lv wkh frqwlqxrxv0wlph frxqwhusduw ri wkh prgho
zlwk lqdwlrq0lqgh{hg erqgv wkdw zh vroyhg lq vhfwlrq 6151 Zh dujxhg lq
Fkdswhuv 6 dqg 7 wkdw rxu glvfuhwh0wlph dssur{lpdwh dqdo|wlfdo vroxwlrq lv
h{dfw lq frqwlqxrxv wlph zlwk glxvlrqv iru dvvhw sulfhv/ surylghg wkdw wkh
hodvwlflw| ri lqwhuwhpsrudo vxevwlwxwlrq lv rqh1 Zh qrz suryh wklv fodlp1
Wkh Ehoopdq htxdwlrq iru wkh uhfxuvlyh0xwlolw| prgho zlwk # @ 4 lv
lghqwlfdo wr +8149,/ h{fhsw wkdw zh vxevwlwxwh +81:3, iru wkh lqvwdqwdqhrxv
srzhu xwlolw| ri frqvxpswlrq h3q| F 3 @+4 ,1 Wkh uvw0rughu frqglwlrq
iru frqvxpswlrq +wkh hqyhorsh frqglwlrq, ehfrphv
M
F @ +4 , > +81:4,
M`
45:
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dqg wkh uvw0rughu frqglwlrq iru lv lghqwlfdo wr +814;,1 Zh qrz jxhvv wkdw
wkh vroxwlrq wr wkh Ehoopdq htxdwlrq kdv wkh irup
Z 3
M +Z> u> w, @ L +u> w, = +81:5,
4
Vxevwlwxwlrq ri wklv jxhvv dqg wkh uvw0rughu frqglwlrqv lqwr wkh Ehoopdq
htxdwlrq ohdg wr wkh iroorzlqj ruglqdu| glhuhqwldo htxdwlrq +RGH,=

2
3 @ orj L . orj . .u
4 52o

2o Lo 2 o Lo 2o Loo
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5 L 4 L 5 +4 , L
Wklv htxdwlrq kdv dq h{dfw vroxwlrq ri wkh irup
L +u> w, @ h{s iFf . F u| j > +81:7,
zkhuh F @ +4 ,@+ . o ,/ dqg Ff lv jlyhq lq wkh Dsshqgl{1 Wklv vroxwlrq
lpsolhv d frqvwdqw frqvxpswlrq0zhdowk udwlr htxdo wr / dqg dq rswlpdo
sruwirolr uxoh jlyhq e| +8159, zlwk k @ 1
Zkhq wkh hodvwlflw| ri lqwhuwhpsrudo vxevwlwxwlrq lv qrw htxdo wr rqh/
zh fdq vwloo rewdlq dq dssur{lpdwh dqdo|wlfdo vroxwlrq dorqj wkh olqhv ri wkh
vroxwlrq zh suhvhqwhg lq vhfwlrq 8141 Wkh Ehoopdq htxdwlrq lv rqfh djdlq
lghqwlfdo wr +8149,/ h{fhsw wkdw zh vxevwlwxwh +819<, iru wkh lqvwdqwdqhrxv
srzhu xwlolw| ri frqvxpswlrq1 Wkh uvw0rughu frqglwlrq iru frqvxpswlrq lv
qrz !
^+4 , M` !
F@ 3
> +81:8,
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dssur{lpdwh dqdo|wlfdo vroxwlrq wr wklv htxdwlrq xvlqj wkh vdph dssurdfk
dv lq vhfwlrq 8141 Rqfh djdlq/ wkh hqyhorsh frqglwlrq +81:8, lpsolhv wkdw
uvw whup ri wkh htxdwlrq/ K 3 / lv wkh rswlpdo frqvxpswlrq0zhdowk udwlr1
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lqyhvwru*v zloolqjqhvv wr vxevwlwxwh frqvxpswlrq lqwhuwhpsrudoo| rqo| lqgl0
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zhdowk0udwlr1
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ghqfh wkdw wkh yrodwlolw| ri vwrfn uhwxuqv lv wlph ydu|lqj1 Sduwldo vxuyh|v ri
wkh hqruprxv olwhudwxuh rq wlph0ydu|lqj yrodwlolw| duh jlyhq e| Eroohuvohy/
Fkrx/ dqg Nurqhu +4<<5,/ Khqwvfkho +4<<8,/ Jk|vhov/ Kduyh|/ dqg Uhqdxow
+4<<9,/ dqg Fdpsehoo/ Or/ dqg PdfNlqod| +4<<:/ Fkdswhu 45,1
Fkdfnr dqg Ylfhlud +4<<<, h{soruh wkh lpsolfdwlrqv ri fkdqjlqj yrodwlolw|
iru orqj0whup sruwirolr fkrlfh1 Wkh| dvvxph wkdw wkh rqo| vrxufh ri wlph0
yduldwlrq lq lqyhvwphqw rssruwxqlwlhv lv wlph0yduldwlrq lq lqvwdqwdqhrxv suh0
flvlrq/ wkh lqyhuvh ri wkh lqvwdqwdqhrxv yduldqfh ri vwrfn uhwxuqv1 Wkhlu
prgho zulwhv || iru lqvwdqwdqhrxv suhflvlrq/ dqg htxdwlrqv +814,0+816, eh0
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frph
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dqg g]c| g]+c| @ + gw1 Wkxv suhflvlrq iroorzv d phdq0uhyhuwlqj surfhvv
fruuhodwhg zlwk vwrfn uhwxuqv/ zlwk orqj0whup phdq htxdo wr + dqg uhyhuvlrq
sdudphwhu + A 31. Wklv prgholqj fkrlfh lpsolhv wkdw wkh udwlr ri wkh
phdq h{shfwhg h{fhvv vwrfn uhwxuq wr wkh yduldqfh ri vwrfn uhwxuqv/ zklfk
ghwhuplqhv wkh p|rslf sruwirolr/ lv olqhdu lq wkh vwdwh yduldeoh +suhflvlrq,1
Krzhyhu/ wkh Vkdush udwlr lv qrw d olqhdu ixqfwlrq ri wkh vwdwh yduldeoh/ exw
d vtxduh0urrw ixqfwlrq1 Wkxv wklv prgho lv qrw pdwkhpdwlfdoo| htxlydohqw wr
wkh prgho zh glvfxvvhg hduolhu lq wklv fkdswhu zlwk d olqhdu/ phdq0uhyhuwlqj
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Fkdfnr dqg Ylfhlud +4<<<, qrwh wkdw wkh sdudphwhul}dwlrq ri wkh suh0
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4<59134 0 4<<:145 4;:4 0 4<<:
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shu |hdu/ dqg dq xqfrqglwlrqdo vwdqgdug ghyldwlrq ri vwrfn uhwxuqv durxqg
53( shu |hdu1 Wkh lqvwdqwdqhrxv fruuhodwlrq ehwzhhq vkrfnv wr yrodwlolw|
dqg vwrfn uhwxuqv + + , lv qhjdwlyh dqg uhodwlyho| odujhdoprvw 87(
lq wkh prqwko| vdpsoh dqg 6:( lq wkh dqqxdo vdpsoh1 Wkh hvwlpdwh ri
wkh phdq0uhyhuvlrq sdudphwhu + lpsolhv d kdoi0olih ri d suhflvlrq vkrfn ri
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jxhvv iru wkh ydoxh ixqfwlrq ri wkh irup M+Z> |> w, @ L+|> w,Z|3 @+4 ,
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vwrfnv1
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suhihuhqfh +, htxdo wr 9( dqqxdoo|> zkhq # @ 4/ wklv lv dovr wkh rswlpdo/
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466
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Wdeoh 815= Phdq Rswlpdo Shufhqwdjh Doorfdwlrq wr Vwrfnv dqg Shufhqwdjh

Khgjlqj Ghpdqg Ryhu P|rslf Ghpdqg
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4133 55416< 3133 53;166 3133

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frqvlghudwlrqv1
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sdudphwhu dhfwv wkh rswlpdo sruwirolr ghpdqg iru vwrfnv wkurxjk wkh fr0
hflhqw F h 1 Fkdfnr dqg Ylfhlud +4<<<, vkrz wkdw wkh devroxwh vl}h ri wkh
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zkhq A 41
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khgjlqj ghpdqg wr p|rslf ghpdqg1 Iljxuh 814 sorwv wkh udwlr ri khgjlqj
467
WLPH
Iljxuh 814= Hhfw ri shuvlvwhqfh rq sruwirolr ghpdqg
468
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zlwk @ 531
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qhjdwlyh fruuhodwlrq ri wkhvh vkrfnv zlwk uhdol}hg h{fhvv vwrfn uhwxuqv/ vxj0
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S 5?}*iihL_ L_i*t Lu Lh|uL*L LUi |

w@MLh W?UL4i
S 4L_i* | i_ *@MLh tTT*)
Lq wklv vhfwlrq zh frqvlghu d vlpsoh prgho ri sruwirolr fkrlfh zlwk dq lqyhvw0
phqw krul}rq ri rqh shulrg1 Dq lqyhvwru/ hqgrzhg zlwk vrph lqlwldo/ {hg
dprxqw ri qdqfldo zhdowk Z| / pdnhv d sruwirolr ghflvlrq dw wlph w dqg
frqvxphv wkh oltxlgdwlrq ydoxh ri khu sruwirolr Z|n soxv wkh uhdol}dwlrq ri
d qrq0qhjdwlyh udqgrp yduldeoh \|n +_oderu lqfrph%, rqh shulrg odwhu1
Wkh frqglwlrqdo glvwulexwlrq ri oderu lqfrph lv orjqrupdo/ zlwk ||n @
orj+\|n , Q+|> 2+ ,= Wkh lqyhvwru fdqqrw eruurz djdlqvw ixwxuh oderu lq0
frph dqg xvh wkh surfhhgv wr qdqfh lqlwldo lqyhvwphqw1 Wkhuhiruh/ kxpdq
zhdowk lv d qrqwudgdeoh dvvhw1 Vlqfh wkh lqyhvwru uhfhlyhv oderu lqfrph rqo|
dw wlph w . 4/ kxpdq zhdowk K| lv sursruwlrqdo wr H| \|n 1
Wkh lqyhvwphqw rssruwxqlw| vhw lv wkh vdph dv lq rxu lqwurgxfwru| h{dp0
soh1 Wkhuh duh wzr dvvhwv dydlodeoh iru lqyhvwphqw/ d ulvnohvv dvvhw dqg d ulvn|
dvvhw1 Wkh ulvnohvv dvvhw kdv d {hg vlpsoh uhwxuq Us / zlwk us @ orj+4.Us ,1
Wkh ulvn| dvvhw kdv d udqgrp vlpsoh uhwxuq/ U|n zlwk frqvwdqw h{shfwhg
orj h{fhvv uhwxuq H| û|n us ` @ > wkh xqh{shfwhg orj uhwxuq rq wkh ulvn|
dvvhw/ ghqrwhg e| x|n / lv frqglwlrqdoo| qrupdo/ zlwk phdq }hur dqg yduldqfh
2 1 Wkh uhwxuq rq wkh ulvn| dvvhw pd| eh fruuhodwhg zlwk oderu lqfrph/
zlwk Fry| +||n > u|n , @ + 1 Ilqdoo|/ zh dvvxph wkdw wkh lqyhvwru lv ulvn
dyhuvh/ zlwk suhihuhqfhv ryhu frqvxpswlrq ghvfulehg e| d vwdqgdug srzhu
xwlolw| ixqfwlrq zlwk frqvwdqw uhodwlyh ulvn dyhuvlrq frhflhqw 1
Wkh lqyhvwru*v rswlpl}dwlrq sureohp lv wr fkrrvh wkh vkduh ri Z| lq0
yhvwhg lq wkh ulvn| dvvhw +| , wkdw pd{lpl}hv wkh h{shfwhg xwlolw| ri khu
frqvxpswlrq dw wkh hqg ri wkh shulrg +F|n ,/
% 3 &
F
pd{ H| |n +915,
k| 4
vxemhfw wr wkh exgjhw frqvwudlqw
F|n @ Z| +4 . URc|n , . \|n > +916,
zkhuh
URc|n @ | +U|n Us , . Us = +917,
Wklv lv d vlpsoh sureohp wkdw lqyroyhv rqo| rqh ghflvlrq uxoh/ sruwirolr
fkrlfhwkhuh lv qr vdylqj ghflvlrq lqyroyhg khuh1 Rqh ri wkh glfxowlhv ri
477
fkdudfwhul}lqj rswlpdo sruwirolr fkrlfh zlwk qrqwudgdeoh/ ulvn| oderu lqfrph

lv wkdw wkhuh duh qr h{dfw dqdo|wlfdo vroxwlrqv dydlodeoh hyhq lq d prgho dv
vlpsoh dv wklv1 Krzhyhu/ zh fdq h{whqg wkh orjolqhdu vroxwlrq phwkrgv ri
suhylrxv fkdswhuv wr qg dq dssur{lpdwh dqdo|wlfdo vroxwlrq1
Wr ghulyh d orjolqhdu dssur{lpdwlrq wr wkh exgjhw frqvwudlqw/ zh uvw
wdnh orjv ri +916, diwhu glylglqj erwk vlghv ri wkh htxdwlrq e| \|n 1 Vhfrqg/
zh xvh d uvw0rughu Wd|oru h{sdqvlrq ri wkh orj ri wkh uljkw0kdqg0vlgh durxqg
wkh phdq orj uhwxuq rq zhdowk Hôrj+4 . URc|n ,` uR / dqg wkh phdq orj
zhdowk0lqfrph udwlr Hôrj+Z| @\|n ,` z |1 Wklv jlyhv
f|n ||n @ orj +h{s iuRc|n . z ||n j . 4,

n . ^z| . uRc|n ||n ` > +918,
zkhuh dqg n ghqrwh orjolqhdul}dwlrq frqvwdqwv dqg orzhufdvh ohwwhuv ghqrwh

yduldeohv lq orjv1 Wkh orjolqhdul}dwlrq frqvwdqw lv jlyhq e|
h{s iuR . z |j
@ ? 4= +919,
4 . h{s iuR . z |j
Wr frpsxwh wkh orj uhwxuq rq zhdowk/ zh xvh wkh vdph dssur{lpdwlrq dv lq

suhylrxv fkdswhuv +vhh/ iru h{dpsoh/ htxdwlrq +5154, lq Fkdswhu 5,=
4
uRc|n @ | +u|n us , . us . | +4 | , 2 = +91:,
5
Lq wklv vlqjoh0shulrg sureohp/ wkh exgjhw frqvwudlqw +918, dovr ghvfulehv
rswlpdo frqvxpswlrq jlyhq wkh uhwxuq rq wkh rswlpdo sruwirolr1 Orj rswlpdo
frqvxpswlrq lv +xs wr d frqvwdqw n, d zhljkwhg dyhudjh ri hqg0ri0shulrg orj
qdqfldo zhdowk +z| .uRc|n , dqg orj oderu lqfrph +||n ,/ zlwk zhljkwv jlyhq
e| dqg +4 ,/ uhvshfwlyho|=
f|n n . +z| . uRc|n , . +4 ,||n = +91;,
Wkh orjolqhdul}dwlrq sdudphwhu kdv d qdwxudo lqwhusuhwdwlrq dv wkh hodv0

wlflw| ri frqvxpswlrq zlwk uhvshfw wr qdqfldo zhdowk/ zkloh +4 , lv wkh
hodvwlflw| ri frqvxpswlrq zlwk uhvshfw wr oderu lqfrph1 Ehfdxvh 3 ? ? 4/

wL}*?i@h3@|L? t TLttM*i ? |t 4L_i* MiU@ti @** ^@?||it ?L*i_ @hi TLt|i
`| @?_ t|n @hi ML| TLt|i M) @tt4T|L?c @?_ |i uLh4 Lu |i |*|) u?U|L? i?thit
|@| |i ?it|Lh ** LT|4@**) ULLti k tL |@| -Rc|n : f @?_c UL?tiî?|*)c |n :
f Ai ?it|Lh ** ULLti @? LT|4@* TLh|uL*L t|h@|i}) |@| i?thit t|hU|*) TLt|i
UL?t4T|L? MiU@ti |i 4@h}?@* |*|) Lu UL?t4T|L? |i?_t |L n" i? UL?t4T|L?
@TThL@Uit 3ihL uLh @** *ii*t Lu hi*@|i ht! @ihtL?
478
wkh frqvxpswlrq ixqfwlrq lv d vwulfwo| frqfdyh ixqfwlrq ri qdqfldo zhdowk

dqg oderu lqfrph1e
Wkh hodvwlflw| ri frqvxpswlrq zlwk uhvshfw wr qdqfldo zhdowk qrw rqo|
ghwhuplqhv wkh fxuydwxuh ri wkh frqvxpswlrq ixqfwlrq/ exw dovr sod|v d fux0
fldo uroh lq wkh ghwhuplqdwlrq ri rswlpdo sruwirolr fkrlfh1 Lq idfw/ lw lv wkh
olqn ehwzhhq sruwirolr fkrlfh dqg frqvxpswlrq1 Wr vhh wklv/ frqvlghu wkh
uvw rughu frqglwlrq ri wkh sureohp=
k l k l
3 3
H| F|n +4 . U|n , @ H| F|n +4 . Us , = +91<,
D vhfrqg rughu Wd|oru h{sdqvlrq ri wklv htxdwlrq durxqg wkh frqglwlrqdo

phdqv ri f|n dqg u|n jlyhv
4 2
H| û|n us ` . | @ Fry| +f|n > uc|n , +9143,
5
@ Fry| +n . +z| . uRc|n , . +4 ,||n > uc|n ,

@ | 2| . +4 , Fry| +||n > u|n , >
zkhuh wkh vhfrqg olqh vxevwlwxwhv wkh frqvxpswlrq ixqfwlrq +91;, lqwr wkh
uvw olqh/ dqg wkh wklug olqh vxevwlwxwhv wkh orj uhwxuq rq zhdowk uRc|n dv
jlyhq e| +91:, lqwr wkh vhfrqg olqh1
Vroylqj +9143, iru wkh sruwirolr uxoh/ zh rewdlq

4 . 2 @5 4 +
| @ > +9144,
2 2
zkhuh zh kdyh vxevwlwxwhg lq wkh prphqwv ri uhwxuqv dqg oderu lqfrph1

Wkh rswlpdo doorfdwlrq wr wkh ulvn| dvvhw kdv wzr frpsrqhqwv1 Wkh
uvw frpsrqhqw ghvfulehv wkh rswlpdo doorfdwlrq zkhq oderu lqfrph ulvn lv
lglrv|qfudwlf/ wkdw lv/ xqfruuhodwhg zlwk wkh ulvn| dvvhw1 Wklv frpsrqhqw lv
lqyhuvho| sursruwlrqdo wr wkh zhdowk hodvwlflw| ri frqvxpswlrq 1
Wkh vhfrqg frpsrqhqw ri +9144, lv d khgjlqj frpsrqhqw1 Wkh ghvludelo0
lw| ri wkh ulvn| dvvhw ghshqgv qrw rqo| rq lwv h{shfwhg h{fhvv uhwxuq uhodwlyh
wr lwv yduldqfh/ exw dovr rq lwv delolw| wr khgjh frqvxpswlrq djdlqvw d edg
uhdol}dwlrq ri oderu lqfrph1 Li wkh fryduldqfh ehwzhhq wkh ulvn| dvvhw uh0
wxuq dqg oderu lqfrph lv qhjdwlyh/ wkhq wkh ulvn| dvvhw rhuv d jrrg khgjh
djdlqvw qhjdwlyh lqfrph vkrfnv/ dqg wklv lqfuhdvhv wkh rswlpdo doorfdwlrq1
e
@hhL** @?_ k4M@** EbbS @i tL? |@| |i LT|4@* UL?t4T|L? u?U|L? 4t|
Mi t|hU|*) UL?U@i | ++ Thiuihi?Uit @?_ *@MLh ?UL4i ?Uih|@?|) 5ii @*tL kLL
EbbHc bbb
479
Wklv frpsrqhqw ri ulvn| dvvhw ghpdqg lv lqfuhdvlqj lq wkh oderu lqfrph

hodvwlflw| ri frqvxpswlrq +4 ,1
Zkhq oderu lqfrph ulvn lv lglrv|qfudwlf ++ @ 3,/ wkh vhfrqg frp0
srqhqw
ri +9144, lv }hur dqg zh duh ohiw zlwk wkh uvw frpsrqhqw/
| @
. @5 @ 1 Vlqfh 3 ? ? 4/ zh kdyh wkdw | A . @5 @ 2 1
2 2 2
Wkh uljkw0kdqg0vlgh ri wklv lqhtxdolw| lv wkh rswlpdo vkduh ri wkh ulvn| dvvhw
lq wkh sruwirolr ri dq lqyhvwru zlwkrxw oderu lqfrph/ zkrvh zhdowk lv hq0
wluho| wudgdeoh1 Wkxv wkh uhvxow zh rewdlqhg lq rxu lqwurgxfwru| h{dpsoh
zlwk ulvnohvv oderu lqfrph fduulhv ryhu wr wkh fdvh lq zklfk oderu lqfrph lv
ulvn|/ surylghg wkdw oderu lqfrph ulvn lv lglrv|qfudwlf1 Wkdw lv/ wkh rswlpdo
ulvn| dvvhw doorfdwlrq lv odujhu wkdq wkh rswlpdo doorfdwlrq ri dq lqyhvwru
zkrvh zhdowk lv hqwluho| wudgdeoh1
Dqrwkhu zd| wr xqghuvwdqg wklv uhvxow lv wr qrwh wkdw +919, lpsolhv
4 4
@ 4.
h{siz . uR |j
h{si|j
@ 4.
h{siz . uR j
4 . K@Z = +9145,
Vxevwlwxwlrq lqwr htxdwlrq +9144, vkrzv wkdw wkh rswlpdo sruwirolr zlwk lg0
lrv|qfudwlf oderu lqfrph uhvhpeohv wkh rswlpdo sruwirolr zlwk ulvnohvv oderu
lqfrph jlyhq lq +914,1 Lq idfw/ wkh h{suhvvlrq iru | lq +9144, zlwk + @ 3
dssurdfkhv +914, dv wkh yduldqfh ri lqfrph glplqlvkhv dqg wkh wlph lqwhuydo
vkulqnv1D
Wkh hhfw ri lqfuhdvlqj oderu lqfrph ulvn
Vr idu zh kdyh vkrzq wkdw d vlqjoh0shulrg lqyhvwru zlwk lglrv|qfudwl0

fdoo| ulvn| oderu lqfrph vkrxog dozd|v krog pruh ulvn| dvvhwv wkdq dq lq0
yhvwru zlwkrxw oderu lqfrph1 Zh qrz dvn krz dq xqfrpshqvdwhg lqfuhdvh
lq lglrv|qfudwlf oderu lqfrph ulvn dhfwv sruwirolr fkrlfh1 Ehfdxvh kxpdq
zhdowk lv qrqwudgdeoh/ lqyhvwruv fdqqrw glyhuvli| dzd| wkhlu oderu lqfrph
ulvn1 Wkhuh lv dq h{whqvlyh wkhruhwlfdo olwhudwxuh wkdw h{soruhv wkh hhfwv ri
xqdyrlgdeoh _edfnjurxqg% ulvn rq sruwirolr fkrlfh1 Wklv olwhudwxuh ghulyhv
frqglwlrqv xqghu zklfk lqyhvwruv vkrxog uhgxfh wkhlu h{srvxuh wr qdqfldo
D
W? |@| U@ti |i @*i Lu 4@? U@T|@* t t| i^@* |L *@MLh ?UL4ic ic M| ' t|n
At i Tt+ ' t|n Wu |i |4i ?|ih@* t ih) tLh|c |i? i TtoR ** Mi t4@**c @?_
`| i TtoR E `| AihiuLhic *4 E n M| *`| L_ic ih|L?c @?_ 5@4i*tL? Ebb2
Lh! ? UL?|?Lt |4i @?_ UL?t_ih |t U@ti
47:
ulvn zkhq zkhq wkhuh lv dq xqfrpshqvdwhg lqfuhdvh lq edfnjurxqg ulvn1

Wkhvh frqglwlrqv duh txlwh jhqhudo/ dqg vkrxog krog lq prvw hpslulfdoo|
uhohydqw fdvhv1S
Rxu wzr0shulrg prgho zlwk srzhu xwlolw| dqg orjqrupdo lqfrph ulvn
looxvwudwhv wklv uhvxow1 Zh vwduw e| ghqlqj dq xqfrpshqvdwhg lqfuhdvh lq
oderu lqfrph ulvn dv d phdq0suhvhuylqj lqfuhdvh lq wkh yduldqfh ri oderu
lqfrph1 Zh frqwlqxh wr dvvxph wkdw oderu lqfrph lv xqfruuhodwhg zlwk wkh
uhwxuq rq vwrfnv1 Zh zdqw wr ghwhuplqh wkh hhfw ri lqfuhdvlqj ulvn rq wkh
rswlpdo doorfdwlrq wr vwrfnv | 1
Wkh orjqrupdolw| ri oderu lqfrph lpsolhv wkdw

4 2
H| ^\|n ` @ h{s | . + \> +9146,
5
dqg
Ydu| +\|n , @ h{s 5| . 2+ h{s 2+ 4 2t = +9147,
Htxdwlrq +9147, lpsolhv wkdw dq lqfuhdvh lq wkh yduldqfh ri orj oderu lqfrph
+ 2+ , lv htxlydohqw wr dq lqfuhdvh lq wkh yduldqfh ri oderu lqfrph + 2t ,/ vlqfh
2t lv d srvlwlyh prqrwrqh ixqfwlrq ri 2+ 1 Zh zloo irfxv rq 2+ lqvwhdg ri
2t iru pdwkhpdwlfdo frqyhqlhqfh1 Krzhyhu/ htxdwlrq +9146, vkrzv wkdw dq
lqfuhdvh lq 2+ dovr lpsolhv dq lqfuhdvh lq h{shfwhg oderu lqfrph +\ ,/ xqohvv
lw lv frpshqvdwhg e| d uhgxfwlrq lq wkh phdq ri orj oderu lqfrph +|,1 Wkxv
d phdq0suhvhuylqj lqfuhdvh lq wkh yduldqfh ri \| ghqhv dq lpsolflw olqhdu
uhodwlrq ehwzhhq | dqg 2+ =
2+
| @ orj \ = +9148,
5
Rxu remhfwlyh lv wr ghwhuplqh wkh vljq ri wkh wrwdo ghulydwlyh g| @g 2+ /
vxemhfw wr +9148,1 Wkh vroxwlrq +9144, zlwk lglrv|qfudwlf oderu lqfrph ulvn
fdq eh zulwwhq dv
4 . 2 @5
| @ = +9149,
+|> uR , 2
Wklv vkrzv wkdw | grhv qrw ghshqg gluhfwo| rq 2+ 1 Krzhyhu/ lw ghshqgv
rq 2+ wkurxjk / wkh zhdowk hodvwlflw| ri frqvxpswlrq> htxdwlrq +919, vkrzv
wkdw lv d ixqfwlrq ri erwk | dqg uR / dqg wkh phdq0suhvhuylqj frqvwudlqw
+9148, ghqhv d olqhdu uhodwlrq ehwzhhq | dqg 2+ 1 Dovr/ uR lv d ixqfwlrq ri
| 1
S
5ii ,iU!L_|c BL**ihc @?_ 5U*it?}ih EbbSc ,*4i?_Lhu @?_ k4M@** E2fffc BL**ih
@?_ h@|| EbbSc k4M@** Ebbc kLL EbbHc bbbc @?_ h@|| @?_ ~iU!@tih EbH.
47;
Xvlqj wkh fkdlq uxoh ri glhuhqwldwlrq zh kdyh wkdw

g| g| g
@ +914:,
g 2+ g g 2+

g| C g| C CuR g|
@ . =
g C| g2+ CuR C| g 2+
Wkhuhiruh/ wkh wrwdo ghulydwlyh ri | zlwk uhvshfw wr d phdq0suhvhuylqj vsuhdg

lq 2+ htxdov
g| 2 +g| @g, +C@C|,
@ > +914;,
g2+ 4 +g| @g, +C@CuR , +CuR @C| ,
zkhuh zh kdyh vxevwlwxwhg lq g|@g2+ @ 4@51
D vxflhqw frqglwlrq iru g| @g 2+ lq +914;, wr eh qhjdwlyh lv wkdw CuR @C| A
.
31 Exw iurp +91:,

CuR 4 2 4
@ . 4 > +914<,
C| 5
vr CuR @C| A 3 li A +4@, A 41 Wr xqghuvwdqg wklv uhvxow/ qrwh wkdw dq

lqyhvwru zlwk @ 4@ krogv wkh jurzwk0rswlpdo sruwirolr zlwk wkh kljkhvw
dyhudjh orj uhwxuq1 Dq| pruh frqvhuydwlyh lqyhvwru kdv d orzhu doorfdwlrq wr
vwrfnv wkdq wkh jurzwk0rswlpdo sruwirolr/ dqg khqfh khu orj sruwirolr uhwxuq
lqfuhdvhv zlwk 1 Zh frqfoxgh wkdw vxflhqwo| frqvhuydwlyh lqyhvwruv +zlwk
ulvn dyhuvlrq juhdwhu wkdq 4@, vkrxog uhgxfh wkhlu sruwirolr h{srvxuh wr
ulvn| dvvhwv zkhq wkhuh lv d phdq0suhvhuylqj lqfuhdvh lq wkh yduldqfh ri
oderu lqfrph1H
.
At t i@t) |L tL t?} |i i ThittL?t uLh k| c 4 @?_ + ? ESSc ESS @?_ ESD
6ht|c ?L|i |@| _k| *_4 ' 34! k| fc @?_ Y4*Y+ ' 34* i TtoR n 3 + f AihiuLhic
|i ?4ih@|Lh Lu _k| *_j 2+ t @*@)t ?i}@|i 5iUL?_c i @*tL @i _k| *_4 fc @?_
Y4*YoR ' 4* i TtoR n 3 + : f ? |i _i?L4?@|Lh At 4T*it |@| YoR *Yk| : f t
tUi?| uLh |i _i?L4?@|Lh Lu _k| *_j 2+ |L Mi TLt|ic @?_ |i _ih@|i |ti*u |L Mi
?i}@|i
H
At hit*| t UL?tt|i?| | |i @?@*)tt Lu ,iU!L_|c BL**ihc @?_ 5U*it?}ih
EbbS 5|hL?}ih hit*|t @hi TLttM*i u |ihi t @? TTih ML?_ L? *@MLh ?UL4i Lh u
|i ?Uhi@ti ? *@MLh ?UL4i ht! |@!it L|ih uLh4t 6Lh i @4T*ic u |i ?Uhi@ti ? *@MLh
?UL4i ht! |@!it |i uLh4 Lu @__?} @ 3ihL4i@? ht! t|@|t|U@**) ?_iTi?_i?| Lu ?@?U@*
ht!c BL**ih @?_ h@|| EbbS tL |@| TLih |*|)Q? u@U|c @?) |*|) u?U|L? ? |i
O+ U*@ttQt tUi?| uLh _k| *_j 2+ f |L LM|@? h@|| @?_ ~iU!@tih EbH. @?_
k4M@** Ebb LM|@? t4*@h hit*|t i? |i ?Uhi@ti ? *@MLh ?UL4i ht! |@!it |i
uLh4 Lu @__?} @ *L||ih) | t|hU|*) ?i}@|i T@)Lgtc Lh @__?} @ *L||ih) |@| ?Uhi@tit
|i 4@h}?@* |*|) Lu i@*|c hitTiU|i*)
47<
S2 6*i M*i *@MLh tTT*)

Vr idu zh kdyh dvvxphg wkdw oderu vxsso| lv {hg1 Wkh lqyhvwru fdqqrw ydu|
zrun hruw lq uhvsrqvh wr frqglwlrqv/ exw pxvw dffhsw zkdwhyhu udqgrp
vwuhdp ri oderu lqfrph lv jlyhq wr klp1
Erglh/ Phuwrq/ dqg Vdpxhovrq +4<<5, hpskdvl}h wkdw wkh delolw| wr dg0
mxvw oderu vxsso| ixuwkhu lqfuhdvhv dq lqyhvwru*v zloolqjqhvv wr wdnh rq qdq0
fldo ulvn1 Li dq lqyhvwru fdq uhvsrqg wr dgyhuvh flufxpvwdqfhv e| lqfuhdvlqj
zrun hruw dv zhoo dv e| uhgxflqj frqvxpswlrq/ wkh lqyhvwru kdv wzr pdujlqv
ri dgmxvwphqw udwkhu wkdq rqh dqg lv pruh wrohudqw ri qdqfldo ulvn1
Zh looxvwudwh Erglh/ Phuwrq/ dqg Vdpxhovrq*v lpsruwdqw srlqw xvlqj d
vlqjoh0shulrg prgho zlwk vhsdudeoh xwlolw| ryhu frqvxpswlrq dqg ohlvxuh=
3
F|n +4 Q|n ,3b
X +F|n > Q|n , @ . = +9153,
4 4
Khuh F|n lv frqvxpswlrq dqg +4 Q|n , 4 lv ohlvxuh wlph dw gdwh w .

41 Zh kdyh qrupdol}hg wkh lqyhvwru*v wlph hqgrzphqw shu shulrg wr rqh/
dqg Q|n lv wkh iudfwlrq ri wklv wlph wkdw wkh lqyhvwru vshqgv dw zrun1
Wkh fxuydwxuh sdudphwhu phdvxuhv wkh lqyhvwru*v uhoxfwdqfh wr ydu| oderu
vxsso| lq uhvsrqvh wr lqfhqwlyhv/ zkloh wkh vfdoh sdudphwhu phdvxuhv wkh
ryhudoo zhljkw ri ohlvxuh yhuvxv frqvxpswlrq lq ghwhuplqlqj xwlolw|1 Wklv
sdudphwhu ghwhuplqhgv wkh dyhudjh ohyho ri oderu vxsso|1
Pdfurhfrqrplvwv kdyh qrwhg wkdw wkh xwlolw| vshflfdwlrq +9153, lv frq0
vlvwhqw zlwk edodqfhg jurzwk/ wkdw lv/ zlwk frqvwdqw oderu vxsso| lq wkh idfh
ri vwhdg| jurzwk lq frqvxpswlrq/ rqo| li @ 4 +Nlqj/ Sorvvhu/ dqg Uhehor
4<;;,1 Edodqfhg jurzwk lv riwhq wkrxjkw wr eh d ghvludeoh surshuw| ri d
pdfurhfrqrplf prgho/ iru wkh vdph uhdvrqv wkdw kdyh ohg xv wr xvh xwlolw|
ixqfwlrqv wkdw duh frqvlvwhqw zlwk frqvwdqw lqwhuhvw udwhv dqg ulvn suhpld lq
wkh idfh ri frqvxpswlrq jurzwk1 Lw lv xqdsshdolqj wr lpsrvh wkh uhvwulfwlrq
@ 4 iru uhdvrqv zh kdyh h{soruhg hduolhu lq wkh errn1 Krzhyhu rqh fdq jhw
durxqg wklv sureohp e| dvvxplqj whfkqrorjlfdo surjuhvv lq ohlvxuh dv zhoo dv
lq surgxfwlrqwklv lv htxlydohqw wr lqwurgxflqj d wuhqg lq wkh sdudphwhu 1
Fdpsehoo dqg Oxgyljvrq +5334, ghyhors wklv srlqw lq ghwdlo1 Khuh zh ljqruh
orqj0uxq jurzwk dqg surfhhg wr zrun zlwk +9153, zlwk d iuhh sdudphwhu 1
Zh dvvxph wkdw oderu vxsso| lv fkrvhq dw wlph w.4= Wkh vwdwlf uvw0rughu
frqglwlrq iru oderu vxsso| lv wkdw wkh pdujlqdo glvxwlolw| ri oderu htxdov wkh
uhdo zdjh ]|n wlphv wkh pdujlqdo xwlolw| ri frqvxpswlrq=
3
+4 Q|n ,3b @ ]|n F|n = +9154,
483
Wr pdnh wkh prgho wudfwdeoh/ zh pxvw orjolqhdul}h wklv uvw0rughu frqglwlrq1

Wdnlqj orjv/ dssur{lpdwlqj lq rxu vwdqgdug idvklrq/ dqg uhduudqjlqj/ zh jhw
q|n @ +}|n f|n o,> +9155,
zkhuh lv wkh hodvwlflw| ri oderu vxsso| zlwk uhvshfw wr wkh uhdo zdjh dqg o
lv d frqvwdqw whup1 Wkh hodvwlflw| @ Q@+4 Q,/ zkhuh Q @ h{s+q, dqg
q lv wkh phdq ohyho ri orj oderu vxsso|1
Wkh dqdo|vlv ri wkh uhvw ri wkh prgho lv yhu| vlplodu wr wkh dqdo|vlv ri wkh
{hg0oderu fdvh1 Zh vwloo kdyh wkh orjolqhdu dssur{lpdwlrq ri wkh exgjhw
frqvwudlqw/
f|n @ n . +z| . uRc|n , . +4 ,||n = +9156,
Vxevwlwxwlqj lq iru orj rxwsxw/
f|n @ n . +z| . uRc|n , . +4 ,+}|n . q|n ,= +9157,
Zh fdq fkrrvh wkh sdudphwhu vr wkdw dyhudjh lqfrph lv wkh vdph dv lq wkh
{hg0oderu fdvh/ wkxv wkhuh qhhg eh qr fkdqjh lq 1
Zh qrz xvh +9155, wr vxevwlwxwh rxw q|n 1 Uhduudqjlqj/ zh jhw
f|n @ nW . +z| . uRc|n , . k|n > +9158,
zkhuh nW lv d frqvwdqw dqg wkh frhflhqwv dqg duh jlyhq e|

@ +9159,
4 . +4 ,
dqg
+4 ,+4 . ,
@ = +915:,
4 . +4 ,
Dv jrhv wr }hur/ wkh djhqw ehfrphv lqqlwho| xqzloolqj wr dgmxvw oderu
vxsso| dqg zh jhw wkh suhylrxv {hg0oderu fdvh zkhuh @ dqg @
+4 ,1 Dv jrhv wr lqqlw|/ oderu vxsso| ehfrphv lqqlwho| hodvwlf dqg
zh jhw @ 3 dqg @ 4@1 Iru doo A 3/ ? dqg A 31b
Ehfdxvh wkh hqyhorsh frqglwlrq krogv/ zh nqrz wkdw wkh pdujlqdo xwlolw|
ri d groodu dw wlph w . 4 htxdov wkh pdujlqdo xwlolw| ri frqvxplqj wkdw groodu1
Vhsdudelolw| lpsolhv wkdw pdujlqdo xwlolw| wdnhv wkh vdph irup dv lq wkh
{hg0oderu fdvh1 Wkxv zh vwloo kdyh
k l k l
3 3
H| F|n +4 . U|n , @ H| F|n +4 . Us , = +915;,
b
Ai t4 q n q ' L?*) u hi*@|i ht! @ihtL? ' At t |i UL?_|L? uLh
M@*@?Ui_ }hL| ?L|i_ i@h*ih
484
D vhfrqg rughu Wd|oru h{sdqvlrq ri wklv htxdwlrq durxqg wkh frqglwlrqdo

phdqv ri f|n dqg u|n jlyhv
4 2
H| û|n us ` . | @ Fry| +f|n > uc|n , +915<,
5
@ Fry| +nW . +z| . uRc|n , . k|n > uc|n ,

@ | 2| . Fry| +k|n > u|n , =
Wklv lpsolhv wkh iroorzlqj sruwirolr uxoh=

4 . 2 @5
| @ = +9163,
2 2
Frpsdulqj wkh uvw whup ri wklv htxdwlrq zlwk wkh htxlydohqw whup lq wkh
{hg0oderu0vxsso| prgho/ dqg uhfdoolqj wkdw ? / zh vhh wkdw wkh delolw|
wr dgmxvw oderu vxsso| lqfuhdvhv wkh sruwirolr vkduh lq wkh ulvn| dvvhw li zdjhv
duh xqfruuhodwhg zlwk ulvn| dvvhw uhwxuqv1 Dv wkh hodvwlflw| ri oderu vxsso|
lqfuhdvhv/ wkh sruwirolr vkduh lq wkh ulvn| dvvhw lqfuhdvhv zlwkrxw olplw vlqfh
dssurdfkhv }hur1
Wkh vhqvlwlylw| ri wkh sruwirolr doorfdwlrq wr d fruuhodwlrq ri zdjhv zlwk
ulvn| dvvhw uhwxuqv lv dovr lqfuhdvlqj lq wkh hodvwlflw| ri oderu vxsso|1 Lq wkh
{hg oderu prgho zlwk @ 3/ wkh frhflhqw @ @ +4 ,@> wklv fr0
hflhqw ehfrphv lqfuhdvlqjo| qhjdwlyh dv lqfuhdvhv/ dssurdfklqj qhjdwlyh
lqqlw| dv jrhv wr lqqlw|1 Lqyhvwruv zlwk h{leoh oderu vxsso| duh sduwlf0
xoduo| dq{lrxv wr khgjh zdjh ulvn/ vlqfh wkh| uhvsrqg wr zdjh xfwxdwlrqv
e| fkdqjlqj wkhlu zrun hruw dqg wkxv zdjh vkrfnv kdyh sduwlfxoduo| odujh
hhfwv rq oderu lqfrph1
S tti| @**LU@|L? | @ tMtt|i?Ui *ii*

Wkurxjkrxw wklv errn zh kdyh dvvxphg wkdw lqyhvwruv mxgjh wkhlu zhoo0ehlqj
e| uhihuhqfh wr wkh devroxwh ohyho ri wkhlu frqvxpswlrq1 Dq dowhuqdwlyh ylhz
lv wkdw lqyhvwruv uhjdug d odujh sduw ri wkhlu frqvxpswlrq dv qhfhvvdu| iru
vxevlvwhqfh/ dqg ghulyh xwlolw| rqo| iurp wkh h{fhvv ri frqvxpswlrq deryh
wkh vxevlvwhqfh ohyho1 Dq hduo| sursrqhqw ri wklv ylhz zdv Pdun Uxelqvwhlq
+4<:9d/ 4<:9e,/ zkr zrunhg zlwk prghov lq zklfk wkh vxevlvwhqfh ohyho lv
frqvwdqw ryhu wlph1 Uxelqvwhlq srlqwhg rxw wkdw orqj0whup lqyhvwruv zrxog
xvh orqj0whup dqqxlwlhv wr qdqfh wkhlu vxevlvwhqfh qhhgv> wkxv kh zdv rqh
ri wkh uvw wr dujxh wkdw orqj0whup lqdwlrq0lqgh{hg erqgv duh wkh ulvnohvv
dvvhw iru orqj0whup lqyhvwruv1
Prghov zlwk frqvwdqw vxevlvwhqfh ohyhov kdyh wkh glfxow| wkdw vxevlv0
whqfh ehfrphv lqfuhdvlqjo| luuhohydqw dv frqvxpswlrq jurzv ryhu wlph1 Pruh
485
uhfhqwo|/ wkhuh kdv ehhq juhdw lqwhuhvw lq _kdelw irupdwlrq% prghov lq zklfk
wkh vxevlvwhqfh ohyho jurzv dorqj zlwk frqvxpswlrq1 Prghov ri _lqwhuqdo
kdelw irupdwlrq% vxfk dv Vxqgduhvdq +4<;<, dqg Frqvwdqwlqlghv +4<<3, kdyh
wkh vxevlvwhqfh ohyho ghshqg rq wkh sdvw klvwru| ri dq lqglylgxdo*v rzq frq0
vxpswlrq/ zkloh prghov ri _h{whuqdo kdelw irupdwlrq% vxfk dv Deho +4<<3,
dqg Fdpsehoo dqg Frfkudqh +4<<<, pdnh lw ghshqg rq wkh sdvw klvwru| ri
djjuhjdwh frqvxpswlrq> lq wkh iruphu fdvh wkh vxevlvwhqfh ohyho lv dhfwhg
e| dq lqglylgxdo*v rzq ghflvlrqv/ zkloh lq wkh odwwhu fdvh lw lv qrw1
Irupdoo|/ wkh vxevlvwhqfh ohyho fdq eh wuhdwhg dv qhjdwlyh oderu lqfrph1
Mxvw dv oderu lqfrph surylghv h{wud uhvrxufhv wr jhqhudwh xwlolw| eh|rqg
wkrvh ri qdqfldo zhdowk/ vr wkh vxevlvwhqfh ohyho gudlqv uhvrxufhv dqg ohdyhv
rqo| sduw ri qdqfldo zhdowk dydlodeoh wr jhqhudwh xwlolw|1 Wkh vxevlvwhqfh
ohyho lv d qrqwudgdeoh oldelolw| mxvw dv oderu lqfrph lv d qrqwudgdeoh dvvhw1
Wkxv lw lv qdwxudo iru xv wr frqvlghu wkhvh prghov dw wklv srlqw lq wkh errn1
Wr vhh wkh irupdo dqdorj| ehwzhhq prghov zlwk oderu lqfrph dqg prg0
hov zlwk d vxevlvwhqfh ohyho/ frqvlghu d vlqjoh0shulrg prgho zlwk d xwlolw|
ixqfwlrq wkdw lv srzhu lq wkh vxusoxv ri frqvxpswlrq ryhu vxevlvwhqfh [=
+F|n [|n ,3
X+F|n > [|n , @ = +9164,
4
Wkh sureohp lv wr pd{lpl}h xwlolw| vxemhfw wr wkh xvxdo vlqjoh0shulrg exgjhw
frqvwudlqw/ zlwkrxw oderu lqfrph=
F|n @ Z|n @ +4 . URc|n ,Z| = +9165,

W
Wklv prgho fdq eh wudqviruphg e| ghqlqj vxusoxv frqvxpswlrq F|n @
F|n [|n 1 Wkhq wkh sureohp lv wr pd{lpl}h srzhu xwlolw| ri vxusoxv
frqvxpswlrq vxemhfw wr wkh exgjhw frqvwudlqw
W
F|n @ +4 . URc|n ,Z| [|n = +9166,
Wklv lv h{dfwo| wkh vdph dv wkh vlqjoh0shulrg sureohp zlwk oderu lqfrph/
h{fhsw wkdw wkh qhjdwlyh whup [|n dsshduv lq wkh exgjhw frqvwudlqw udwkhu
wkdq wkh srvlwlyh whup \|n 1
Wkh idfw wkdw wkh h{wud whup lq wkh exgjhw frqvwudlqw lv qhjdwlyh olplwv
wkh frqglwlrqv xqghu zklfk wklv sureohp kdv d vroxwlrq1 Lw lv hvvhqwldo wkdw
wkh lqyhvwru vkrxog kdyh dvvhwv dydlodeoh wkdw jxdudqwhh wkdw zhdowk qh{w
shulrg zloo dw ohdvw htxdo [|n 1 Lq wkh fdvh zkhuh [|n lv d frqvwdqw/
wklv mxvw uhtxluhv wkdw d ulvnohvv uhdo dvvhw eh dydlodeoh1 Lq wkdw fdvh wkh
lqyhvwru vroyhv wkh sureohp e| lqyhvwlqj wkh glvfrxqwhg ydoxh ri vxevlvwhqfh/
[|n @+4 . Us ,/ lq wkh ulvnohvv dvvhw/ dqg lqyhvwlqj wkh vxusoxv zhdowk Z|
486
[|n @+4 . Us , xvlqj wkh vwdqgdug irupxod iru srzhu xwlolw| ghyhorshg lq
Fkdswhu 51 Wkxv li e lv wkh vkduh ri vxusoxv zhdowk lqyhvwhg lq vwrfnv/ wkh
vkduh ri wrwdo zhdowk lq vwrfnv lv

Z| [|n @+4 . Us , . 2 @5 [|n
@ e @ 4 = +9167,
Z| 2 +4 . Us ,Z|
Wklv doorfdwlrq ri qdqfldo zhdowk wr vwrfnv lv dozd|v vpdoohu wkdq wkh door0
fdwlrq ri dq lqyhvwru zkr grhv qrw kdyh d vxevlvwhqfh ohyho1 Dovr/ lw ghfolqhv
zlwk zhdowk> wkxv dq lqyhvwru zlwk d vxevlvwhqfh ohyho vhoov vwrfnv dv sulfhv
idoo1
Wkhvh uhvxowv duh wkh rssrvlwh ri wkh ehkdylru suhglfwhg iru dq lqyhvwru
zlwk oderu lqfrph/ frqvlvwhqw zlwk wkh lqwxlwlrq wkdw d vxevlvwhqfh ohyho lv
olnh qhjdwlyh oderu lqfrph1 Wkhuh lv d uhodwhg olwhudwxuh wkdw h{soruhv rswl0
pdo lqyhvwphqw vwudwhjlhv iru lqyhvwruv zkr uhtxluh wkdw wkhlu zhdowk dozd|v
h{fhhg d fhuwdlq plqlpxp ohyho1 Vxfk _sruwirolr lqvxudqfh% vwudwhjlhv +Fr{
dqg Ohodqg 4<;5/ Euhqqdq dqg Vfkzduw} 4<;;/ Jurvvpdq dqg ]krx 4<<9,
kdyh wkh vdph surshuw| wkdw wkh doorfdwlrq wr ulvn| dvvhwv ghfolqhv dv sulfhv
idoo1
Wkh vxevlvwhqfh prgho fdq dovr eh dqdo|}hg xvlqj wkh orjolqhdu dssur{l0
pdwh dssurdfk zh ghyhorshg hduolhu1 Wklv doorzv xv wr uhod{ wkh dvvxpswlrq
wkdw wkh vxevlvwhqfh ohyho lv d frqvwdqw nqrzq lq dgydqfh1 Wkh orjolqhdu
dssur{lpdwlrq ri +9166, lv
fW|n @ +z| . uRc|n , . +4 ,{|n > +9168,
vr orj vxusoxv frqvxpswlrq lv d olqhdu frpelqdwlrq ri orj qdqfldo zhdowk

dqg orj kdelw1 Wkh sdudphwhu lv jlyhq e|
h{s+z . uR {, +4 . UR ,Z
@ @ > +9169,
h{s+z . uR {, 4 +4 . UR ,Z [
wkh udwlr ri wrwdo zhdowk wr vxusoxv zhdowk1 Vlqfh A 4/ vxusoxv frqvxpswlrq
uhvsrqgv pruh wkdq sursruwlrqdoo| wr sruwirolr uhwxuqv1
Wklv dssur{lpdwlrq ohdgv wr wkh sruwirolr vroxwlrq

4 . 2 @5 4 o
| @ . 4 = +916:,
2 2
Li wkh vxevlvwhqfh ohyho lv frqvwdqw/ wkh doorfdwlrq wr wkh ulvn| dvvhw lv vpdoohu
wkdq lq wkh srzhu xwlolw| fdvh1 Li wkh vxevlvwhqfh ohyho lv srvlwlyho| fruuhodwhg
zlwk wkh ulvn| dvvhw uhwxuq/ krzhyhu/ wkh doorfdwlrq wr wkh ulvn| dvvhw pd|
lqfuhdvh deryh wkh srzhu xwlolw| ohyho1
487
Lq dsso|lqj wklv dssurdfk/ zh pxvw eh fduhixo wr vshfli| wkh prgho vr

wkdw wkh lqyhvwru fdq jxdudqwhh wkdw klv vxevlvwhqfh qhhgv duh phw1 Zh fdq
doorz vxevlvwhqfh ohyhov wr eh udqgrp rqo| li wkh| duh gulyhq h{foxvlyho| e|
ulvn| dvvhw uhwxuqv dqg wkxv fdq eh shuihfwo| khgjhg e| wkh lqyhvwru1
Wkhvh uhvxowv fdq eh h{whqghg wr d pxowlshulrg vhwwlqj lq zklfk vxevlv0
whqfh ohyhov pryh ryhu wlph zlwk wkh sdwk ri frqvxpswlrq1 Frqvwdqwlqlghv
+4<<3,/ iru h{dpsoh/ dqdo|}hv dq lqqlwh0krul}rq prgho/ vhw lq frqwlqxrxv
wlph/ zlwk srzhu xwlolw| ri vxusoxv frqvxpswlrq1 Od{ +5333, dggv d 0
qlwh krul}rq dqg frpsduhv glvfuhwh0wlph dqg frqwlqxrxv0wlph yhuvlrqv ri
wkh prgho1 Lq Od{*v vshflfdwlrq/ wkh vxevlvwhqfh ohyho hyroyhv dffruglqj wr
|3
[
[|n @ ! F| . !2 [| @ ! !2 F|3 . !|n
2 [f = +916;,
'f
Wkxv wkh vxevlvwhqfh ohyho dw wlph w . 4 lv nqrzq dw wlph w rqfh frqvxpswlrq

F| kdv ehhq ghwhuplqhg1
Wklv sureohp fdq eh vroyhg rqo| li wkh lqyhvwru kdv d plqlpxp ohyho
ri zhdowk/ htxdo wr wkh suhvhqw ydoxh ri fxuuhqw dqg doo ixwxuh vxevlvwhqfh
ohyhov xqghu wkh dvvxpswlrq wkdw vxusoxv frqvxpswlrq lv }hur wrgd| dqg lq
wkh ixwxuh1 Li wkh lqyhvwru kdv pruh zhdowk wkdq wklv/ Od{ +5333, vkrzv
wkdw wkh sruwirolr vroxwlrq fdq eh ghvfulehg dv iroorzv1 Kdylqj fkrvhq
fxuuhqw frqvxpswlrq/ wkh lqyhvwru fdofxodwhv wkh suhvhqw ydoxh ri doo ixwxuh
vxevlvwhqfh ohyhov dvvxplqj wkdw vxusoxv frqvxpswlrq lv }hur lq doo ixwxuh
shulrgv1 Wklv dprxqw lv vhw dvlgh lq wkh ulvnohvv dvvhw/ dqg wkh uhpdlqghu
ri lqyhvwhg zhdowk lv doorfdwhg xvlqj wkh vwdqgdug irupxod iru srzhu xwlolw|1
Wklv vroxwlrq fdq eh xvhg wr h{soruh krul}rq hhfwv rq sruwirolr fkrlfh1
Frqvlghu wzr lqyhvwruv zlwk wkh vdph fxuuhqw vxevlvwhqfh ohyho dqg wkh vdph
zhdowk/ exw glhuhqw lqyhvwphqw krul}rqv1 Jlyhq htxdo fxuuhqw frqvxpswlrq
iru erwk lqyhvwruv/ wkh suhvhqw ydoxh ri ixwxuh vxevlvwhqfh ohyhov lv kljkhu iru
wkh lqyhvwru zlwk d orqjhu krul}rq> wklv irufhv wkh orqj0krul}rq lqyhvwru wr
vhw dvlgh pruh zhdowk lq wkh ulvnohvv dvvhw wr phhw vxevlvwhqfh qhhgv/ jlylqj
wkh orqj0krul}rq lqyhvwru d pruh frqvhuydwlyh sruwirolr dv hpskdvl}hg e|
Vdpxhovrq +4<;<,1 Od{ +5333, srlqwv rxw wkdw wkhuh lv d vhfrqg/ rvhwwlqj
hhfw1 Wkh orqj0krul}rq lqyhvwru zloo frqvxph d vpdoohu iudfwlrq ri zhdowk
wrgd|/ uhgxflqj wkh suhvhqw ydoxh ri klv ixwxuh vxevlvwhqfh ohyhov dqg wlow0
lqj klv ryhudoo sruwirolr wrzdugv ulvn| dvvhwv1 Krzhyhu wklv vhfrqg hhfw
glplqlvkhv dv wkh wlph lqwhuydo vkulqnv/ vlqfh wkh fxuuhqw frqvxpswlrq rz
vkulqnv uhodwlyh wr zhdowk ru wkh suhvhqw ydoxh ri doo vxevlvwhqfh ohyhov> lq
wkh olplw ri frqwlqxrxv wlph/ wkh vhfrqg hhfw glvdsshduv dowrjhwkhu1 Wkxv
wkh Vdpxhovrq +4<;<, hhfw lv wkh urexvw suhglfwlrq ri wklv prgho1
488
Lw lv whpswlqj wr xvh wkhvh uhvxowv wr h{sodlq djh sdwwhuqv lq sruwirolr

fkrlfh1 Krzhyhu wkhuh duh slwidoov lq grlqj wklv1 Iluvw/ vxevlvwhqfh ohyhov
wkhpvhoyhv pd| ydu| v|vwhpdwlfdoo| zlwk djh1 Wklv pd| kdsshq hqgrjh0
qrxvo| wkurxjk wkh g|qdplfv lpsolhg e| htxdwlrq +916;,1 Li |rxqj lqyhvwruv
vwduw olih zlwk yhu| orz vxevlvwhqfh ohyhov/ wkhlu vxevlvwhqfh ohyhov zloo whqg wr
ulvh ryhu wlph uhodwlyh wr zhdowk/ wlowlqj wkhlu sruwirolrv hyhq ixuwkhu wrzdugv
vdih dvvhwv1 Rq wkh rwkhu kdqg/ li lqyhvwruv vwduw olih zlwk yhu| kljk vxevlv0
whqfh ohyhov uhodwlyh wr zhdowk/ wkhlu vxevlvwhqfh ohyhov zloo whqg wr idoo ryhu
wlph uhodwlyh wr zhdowk dqg wkhlu sruwirolrv pd| wlow wrzdugv ulvn| dvvhwv1
Dowhuqdwlyho|/ wkhuh pd| eh sxuh djh hhfwv rq vxevlvwhqfh ohyhov/ dqdorjrxv
wr wkh djh hhfwv rq oderu lqfrph grfxphqwhg lq Fkdswhu :1
Vhfrqg/ wkhvh uhvxowv ghshqg fulwlfdoo| rq wkh dvvxpswlrq wkdw vxevlv0
whqfh ohyhov duh ghwhuplqhg e| wkh klvwru| ri dq lqyhvwru*v rzq frqvxpswlrq1
Dq dowhuqdwlyh ylhz lv wkdw vxevlvwhqfh ohyhov duh gulyhq e| wkh g|qdplfv ri
djjuhjdwh frqvxpswlrq/ dv lqyhvwruv vhhn wr fdwfk xs zlwk wkh olylqj vwdq0
gdugv ri vrflhw| dv d zkroh +_fdwfklqj xs zlwk wkh Mrqhvhv%/ lq Deho*v +4<<3,
whuplqrorj|,1 Rq wklv ylhz wkh sruwirolr wkdw lv uhtxluhg wr phhw vxevlv0
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30
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10
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Frqvwuxfwlrq 3144 3133 3143 3147 0 0 3144 3148
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Vhoi0hpsor|hg 316: 3133 3155 3155 3153 314< 3156 3149
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Ilqdqfldo sodqqhuv kdyh wudglwlrqdoo| uhvlvwhg wkh vlpsoh lqyhvwphqw dg0

Iljxuh 415= Wkh Dvvhw Doorfdwlrq Sx}}oh

Rqh srvvleoh h{sodqdwlrq iru wklv sdwwhuq ri dgylfh lv wkdw djjuhvvlyh

uvw ghvfulehg wkh uhvwulfwlyh frqglwlrqv xqghu zklfk orqj0krul}rq lqyhvwruv

wlrqv ri nqrzq h{dfw vroxwlrqv/ vr wkh| duh dffxudwh lq d qhljkerukrrg ri

)LTU Lh|uL*L LUi

2 5Lh||ih4 TLh|uL*L ULUi

wkh sruwirolr uhwxuq lv

URc|n @ | U|n . +4 | ,Usc|n @ Usc|n . | +U|n Usc|n ,= +514,

Phdq0yduldqfh dqdo|vlv zlwk pdq| ulvn| dvvhwv

ri fryduldqfhv ehwzhhq h{fhvv uhwxuqv dqg wkh vxevfulswhg yduldeoh1 Dexvlqj

22 5TiUu)?} |*|) Lu i@*|

pd{ H| X+Z|n , +5143,

+4@5,X+Z| . J, . +4@5,X+Z| J,/ zklfk lv ohvv wkdq X+Z| , ehfdxvh ri wkh

dqg wkh frhflhqw ri uhodwlyh ulvn dyhuvlrq lv ghqhg dv

Iljxuh 514= Frqfdyh xwlolw| ri zhdowk

Wkh irup ri wkh xwlolw| ixqfwlrq

Wudfwdeoh prghov ri sruwirolr fkrlfh uhtxluh dvvxpswlrqv derxw wkh irup

41 Lqyhvwruv kdyh txdgudwlf xwlolw| ghqhg ryhu zhdowk1 Lq wklv fdvh

Zh kdyh douhdg| dujxhg wkdw devroxwh ulvn dyhuvlrq vkrxog ghfolqh/ ru

2  *L}?Lh4@* 4L_i* | TLih |*|)

z|n @ uRc|n . z| > +514:,

H| uRc|n .  2R| @5 @ orj H| +4 . URc|n , +514<,

ehfdxvh wkh sruwirolr uhwxuq lv dvvxphg wr eh orjqrupdo1 Wkxv +514;, fdq

shqdol}lqj wkh yduldqfh ri orj uhwxuqv> zkhq  ? 4/ wkh lqyhvwru dfwxdoo|

Dssur{lpdwlrq ri wkh sruwirolr uhwxuq

Vroxwlrq ri wkh prgho

ixqfwlrq +514;,/ wkh sureohp ehfrphv

22 )LTU *L?}|ih4 TLh|uL*L ULUi

Z|ng @ +4.URgc|ng ,Z| @ +4.URc|n ,+4.URc|n2 ,===+4.URc|ng ,Z| = +515;,

P|rslf sruwirolr fkrlfh zlwkrxw uhedodqflqj

Zh uvw dvvxph wkdw uhedodqflqj lv qrw srvvleoh ehwzhhq w dqg w . N/

duh frqglwlrqdoo| orjqrupdoo| glvwulexwhg1 Iru vlpsolflw| zh uhwxuq wr wkh

Ydu| ugc|ng @ Ydu| u|n . === . Ydu| u|ng @ N2 = +5163,

P|rslf sruwirolr fkrlfh zlwk uhedodqflqj

Wkh dvvxpswlrq wkdw d orqj0krul}rq lqyhvwru fdqqrw uhedodqfh klv sruw0

uR2cc|n2 5us @ +uRc|n us , . +uRc|n2 us ,

Ydu| +uRc|c|n2 , @ +2| . 2|n ,2 +5165,

222 6@**@Uit Lu *L?}|ih4 TLh|uL*L ULUi

22 Lih |*|) Lu UL?t4T|L?

Z|n @ +4 . URc|n ,+Z| F| ,= +5169,

X  +F| , @ H| ^X  +F|n ,+4 . Uc|n ,`> +516:,

D orjqrupdo frqvxpswlrq0edvhg prgho

Wkh qdwxudo zd| wr surfhhg/ jlyhq rxu hduolhu glvfxvvlrq/ lv wr dvvxph

D frqvwdqw frqvxpswlrq0zhdowk udwlr

D glfxow| zlwk wkh orjqrupdo frqvxpswlrq0edvhg prgho lv wkdw wkh

z|n @ uRc|n . orj+4 e,

zkhuh wkh vhfrqg htxdolw| vxevwlwxwhv lq iurp +5154,1

H| u|n usc|n .  2| @5 @ Fry| +u|nc z|n , @ | 2| > +5177,

d frqvwdqw frqvxpswlrq0zhdowk udwlr li wkh h{shfwhg uhwxuq lv frqvwdqw/ ru li

22e ,Tt|i?~? |*|)

zkhuh   +4 ,@+4 4@#,1 Zkhq  @ 4@#/  @ 4 dqg wkh uhfxuvlrq

Constant consumption-wealth ratio

Myopic portfolio choice

Iljxuh 515= Hsvwhlq0]lq xwlolw|

fryduldqfhv zlwk frqvxpswlrq jurzwk/  R| lv wkh yhfwru ri h{fhvv0uhwxuq

`L 5L*_ ) wL?}Aih4

Lq Fkdswhu 5 zh h{soruhg lq ghwdlo wkh frqglwlrqv iru p|rslf sruwirolr fkrlfh1

5|h@|i}U tti| **LU@|L?

aL? v @4TMi** @?_ wt VUih@

uvw ghvfulehg wkh uhvwulfwlyh frqglwlrqv xqghu zklfk orqj0krul}rq lqyhvwruv

)LTU Lh|uL*L LUi

2 5Lh||ih4 TLh|uL*L ULUi

URc|n @ | U|n . +4 | ,Usc|n @ Usc|n . | +U|n Usc|n ,= +514,

22 5TiUu)?} ||) Lu i@|

pd{ H| X+Z|n , +5143,

dqg wkh frhflhqw ri uhodwlyh ulvn dyhuvlrq lv ghqhg dv

41 Lqyhvwruv kdyh txdgudwlf xwlolw| ghqhg ryhu zhdowk1 Lq wklv fdvh

2 L}?Lh4@ 4L_i* | TLih |*|)

z|n @ uRc|n . z| > +514:,

H| uRc|n . 2R| @5 @ orj H| +4 . URc|n , +514<,

shqdol}lqj wkh yduldqfh ri orj uhwxuqv> zkhq ? 4/ wkh lqyhvwru dfwxdoo|

22 )LTU L?}|ih4 TLh|uLL ULUi

Z|ng @ +4.URgc|ng ,Z| @ +4.URc|n ,+4.URc|n2 ,===+4.URc|ng ,Z| = +515;,

Zh uvw dvvxph wkdw uhedodqflqj lv qrw srvvleoh ehwzhhq w dqg w . N/

Ydu| ugc|ng @ Ydu| u|n . === . Ydu| u|ng @ N2 = +5163,

uR2cc|n2 5us @ +uRc|n us , . +uRc|n2 us ,

Ydu| +uRc|c|n2 , @ +2| . 2|n ,2 +5165,

222 6@**@Uit Lu L?}|ih4 TLh|uLL ULUi

22 Lih |*|) Lu UL?t4T|L?

Z|n @ +4 . URc|n ,+Z| F| ,= +5169,

X +F| , @ H| ^X +F|n ,+4 . Uc|n ,`> +516:,

D glfxow| zlwk wkh orjqrupdo frqvxpswlrq0edvhg prgho lv wkdw wkh

z|n @ uRc|n . orj+4 e,

H| u|n usc|n . 2| @5 @ Fry| +u|nc z|n , @ | 2| > +5177,

22e ,Tt|i?~? |*|)

zkhuh +4 ,@+4 4@#,1 Zkhq @ 4@#/ @ 4 dqg wkh uhfxuvlrq

fryduldqfhv zlwk frqvxpswlrq jurzwk/ R| lv wkh yhfwru ri h{fhvv0uhwxuq

`L 5L*_ ) wL?}Aih4

suhihuhqfhv ghyhorshg lq vhfwlrq 51517/ zlwk frqvwdqw uhodwlyh ulvn dyhuvlrq

wL?}Aih4 Lh|uLL LUi ? @ L_i |

Z|n @ +4 . URc|n ,+Z| F| ,= +614,

z|n @ uRc|n . orj+4 h{s+f| z| ,,= +616,

z|n @ f|n . +f| z| , +f|n z|n ,= +618,

2 5Mt|||?} L| UL?t4T|L?

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2| Fry| +u|nc f|n ,

TTU@|L? |L TLh|uLL ULUi

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4 H| u|n usc|n . 2| @5

e `@| t |i ht!*itt @tti|q

Qrz frqvlghu wkh sulflqj ri dq lqdwlrq0lqgh{hg shushwxlw| ru frqvro/

D Bi?ih@3?} |i tL|L?

h{fhsw wkh lqdwlrq0lqgh{hg frqvro lwvhoi1 Li dq lqdwlrq0lqgh{hg frqvro lv

2 L_i* Lu |i Aih4 5|hU|hi Lu W?|ihit|

{|n @ +4 !% , % . !% {| . %%c|n = +6156,

y6c|n @ 6% %%c|n . %6c|n = +6157,

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Wkh rswlpdo sruwirolr ri lqdwlrq0lqgh{hg erqgv

Li rqo| lqdwlrq0lqgh{hg erqgv duh dydlodeoh wr wkh lqyhvwru/ wkh uhdo

|n @ }| . yZc|n > +6164,

y5c|n @ 5% %%c|n . 56 %6c|n . %5c|nc +6166,

sm?c| @ Dm? . Ec?

uec|n H| uec|n @ e% %%c|n . e6 %6c|n = +6169,

22 Ai |ih4 t|hU|hi Lu ?|ihit| h@|it ? |i N5

% 3138;7 3135;: 313836 313:44

H^uc|n ` 41:3( 6133(

H^ |n ` 6199( 6156(

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