| Sumario: | The article focuses on the interpretation and estimation of economist Michael Parkin's Discount House portfolio model. Asset demand and liability supply functions are derived by the constrained maximization of a negative exponential utility function under the assumption that profit is normally distributed. These demand functions are linear in expected rates of return and the scale variable. The rate of return coefficient matrix is a function of the covariance matrix of returns; so also is the scale variable coefficient vector. Because these functional relationships appear to be complex, they are mostly ignored in estimation, with the result that it is not possible to identify the covariance matrix from the demand equations. The objective of this note is to show that it is possible to This is done by using relative rates of return. This procedure has the advantage that the model has a simpler interpretation. Also, the covariance matrix can be estimated from the demand equations. Placing restrictions on the covariance matrix is the natural way to impose more structure on the model; our procedure provides a convenient way to do this.
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