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EVOLUTION OF FIRM SIZE
Journal article

EVOLUTION OF FIRM SIZE

  • GONON, LUKAS ETH Zürich, Department of Mathematics, Rämistrasse 101, 8092 Zürich, Switzerland
  • ROGERS, L. C. G. Statistical Laboratory, University of Cambridge, Wilberforce Road, Cambridge CB3 0WB, UK
  • 2014-7-28
Published in:
  • International Journal of Theoretical and Applied Finance. - World Scientific Pub Co Pte Lt. - 2014, vol. 17, no. 05, p. 1450031
English In this paper, we develop the idea that firm sizes evolve as log Brownian motions dSt = St(σdWt + μdt) where the constants μ, σ are characteristics of the firm, chosen from some distribution, and that the firms are wound up at some random time. At any given time, we see a firm of a given size. What can we say about its characteristics given its size? How would we invest in such a market? What do these assumptions imply about the distribution of sizes? By making simple and well-chosen modeling assumptions, we are able to develop quite concrete forms of the dependence of firm characteristics on size, from which we are able to deduce optimal investment weights as a function of size alone. As in the approach of Fernholz [2002, Stochastic Portfolio Theory. Springer], this avoids the need to estimate growth rates of stocks in order to decide on investment strategy.
Language
  • English
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closed
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https://sonar.ch/global/documents/114301
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