What are "pseudo firms"?

Pseudo firms, which do not exist in reality, are hypothetical firms that we imagine purchase tradeable assets (e.g. commodities, foreign currencies, equity indices, and the like), and issue zero-coupon bonds and equity to finance the purchase.

Like with any parametric model of firms (which are also hypothetical), researchers can study the properties of pseudo firms. Differently from parametric models, the researcher does not need to estimate the parameters underlying the model firm, but can directly rely on the observable prices of traded securities, such as spot prices, interest rates, and options, to analyze the balance sheet properties of the pseudo firms.

The balance sheet of pseudo firms is not only observable, but we can track its dynamics by using real prices, and thus we can better analyze the impact of shocks to assets onto the firm's liabilities, for insstance, and even run experiments using such firms as laboratory.