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Discount Rates And Asset Returns
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Book Synopsis Discount Rates and Asset Returns by : David Brown
Download or read book Discount Rates and Asset Returns written by David Brown and published by . This book was released on 2017 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many endowments and foundations set the annual dollar amount available for current operations as the product of the market value of assets and a relatively fixed spending rate market value spending policy. We show that a market rate spending policy adjusting the percentage of beginning of year assets available for current operations with changes in discount rates/expected returns better meets the key endowment objectives of stable spending and intergenerational neutrality.Fixed spending rates violate intergeneratinoal neutrality. Declining expected returns cause dollar spending to increase with the associated asset value increase beyond sustainable levels which lowers future spending. Some current spending is at the expense of future spending. The opposite occurs when expected returns rise.Market rate spending policies maintain intergenerational neutrality by adjusting spending rates with expected returns. In addition, when discount rates decline (increase) the lower (higher) spending rate offsets some of the impact of the increase (decrease) in asset values. Thus spending is actually more stable with market rate spending when investing in assets whose values are more sensitive to discount rate changes, i.e. longer duration assets. The impact of discount rates on spending volatility can be driven to near zero with investable long duration assets.Monte Carlo simulation analysis shows that market rate spending applied to an equity portfolio reduces year over year spending volatility by over 30% (versus market value spending). Year over year spending volatility using market rate spending applied to a long duration fixed income portfolio is about 70% lower than year over year spending volatility using market value spending applied to a market duration portfolio.
Book Synopsis Discount Rates and Asset Returns by : David Brown
Download or read book Discount Rates and Asset Returns written by David Brown and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Endowments and foundations typically use a Market Value Spending (MVS) policy that distributes for current operations the product of the market value of assets and a spending rate that is adjusted infrequently. We show that that adjusting the spending rate with changes in expected returns, Market Rate Spending (MRS), better meets the key endowment objectives of generational neutrality and stable spending. Fixed spending rates transfer spending to one “generation” at the expense of another generation. The increase in spending when asset values increase due to a decrease in discount rates is not sustainable. Future spending declines as asset returns do not keep pace with the spending rate. The opposite occurs when expected returns rise. MRS maintains generational neutrality by matching spending rates and expected returns. MRS also results in more stable spending than MVS when MRS is paired with investments in long duration assets because the impact of discount rate shocks on spending rates are offset by changes in long duration asset values. Specifically, we show that the “hedge asset” with generationally neutral spending an asset with the duration of a perpetuity. Endowment spending stability depends on the exposure of the endowment portfolio value to risk free rate, risk premium, and cash flow shocks. Smaller equity (larger bond) allocations reduce the portfolio value exposure to cash flow shocks and MRS and MVS spending volatility equally. Since equity assets have long durations, risk premium shocks have a much larger impact on MVS spending. Risk free rate shocks potentially have no impact on MRS spending as the bond allocation duration can be set so the portfolio duration matches the hedge asset duration. Estimated year over year spending volatility from simulated returns for a long duration fixed income portfolio with MRS is more than 90% lower than MVS applied to a market duration bond portfolio. Year over year spending variance estimates from simulated equity returns are 28% to 34% lower than with MVS. The reduction in spending variance using spending rates based on dividend yields is (1) more than four times larger than the ability of the discount rate to forecast (out of sample R2) future one year returns, and (2) approximately 40% to 56% of the variance of equity returns due to discount rate shocks.
Book Synopsis Asset Pricing Theory by : Costis Skiadas
Download or read book Asset Pricing Theory written by Costis Skiadas and published by Princeton University Press. This book was released on 2009-02-09 with total page 363 pages. Available in PDF, EPUB and Kindle. Book excerpt: Asset Pricing Theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing. Costis Skiadas develops in depth the fundamentals of arbitrage pricing, mean-variance analysis, equilibrium pricing, and optimal consumption/portfolio choice in discrete settings, but with emphasis on geometric and martingale methods that facilitate an effortless transition to the more advanced continuous-time theory. Among the book's many innovations are its use of recursive utility as the benchmark representation of dynamic preferences, and an associated theory of equilibrium pricing and optimal portfolio choice that goes beyond the existing literature. Asset Pricing Theory is complete with extensive exercises at the end of every chapter and comprehensive mathematical appendixes, making this book a self-contained resource for graduate students and academic researchers, as well as mathematically sophisticated practitioners seeking a deeper understanding of concepts and methods on which practical models are built. Covers in depth the modern theoretical foundations of competitive asset pricing and consumption/portfolio choice Uses recursive utility as the benchmark preference representation in dynamic settings Sets the foundations for advanced modeling using geometric arguments and martingale methodology Features self-contained mathematical appendixes Includes extensive end-of-chapter exercises
Book Synopsis The Little Book of Valuation by : Aswath Damodaran
Download or read book The Little Book of Valuation written by Aswath Damodaran and published by John Wiley & Sons. This book was released on 2011-03-29 with total page 269 pages. Available in PDF, EPUB and Kindle. Book excerpt: An accessible, and intuitive, guide to stock valuation Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, expert Aswath Damodaran explains the techniques in language that any investors can understand, so you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and pick stocks. Page by page, Damodaran distills the fundamentals of valuation, without glossing over or ignoring key concepts, and develops models that you can easily understand and use. Along the way, he covers various valuation approaches from intrinsic or discounted cash flow valuation and multiples or relative valuation to some elements of real option valuation. Includes case studies and examples that will help build your valuation skills Written by Aswath Damodaran, one of today's most respected valuation experts Includes an accompanying iPhone application (iVal) that makes the lessons of the book immediately useable Written with the individual investor in mind, this reliable guide will not only help you value a company quickly, but will also help you make sense of valuations done by others or found in comprehensive equity research reports.
Book Synopsis Asset Returns, Discount Rate Changes and Market Efficiency by : Michael Smirlock
Download or read book Asset Returns, Discount Rate Changes and Market Efficiency written by Michael Smirlock and published by . This book was released on 2010 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the dictinction between quot;technicralquot; discount rate changes that are endogenous and quot;non-technicalquot; changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and announcement effects. In addition, we examine whether the behaviorof these markets in the post-announcement period is consistent with the rapid price adjustment implied by market efficiency.
Book Synopsis Asset Returns, Discount Rate Changes and Market Efficiency by : Michael Smirlock
Download or read book Asset Returns, Discount Rate Changes and Market Efficiency written by Michael Smirlock and published by . This book was released on 1984 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the dictinction between "technicral" discount rate changes that are endogenous and "non-technical" changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and announcement effects. In addition, we examine whether the behaviorof these markets in the post-announcement period is consistent with the rapid price adjustment implied by market efficiency
Download or read book Asset Pricing written by John H. Cochrane and published by Princeton University Press. This book was released on 2009-04-11 with total page 560 pages. Available in PDF, EPUB and Kindle. Book excerpt: Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
Author :Mario Lavallée Publisher :Ann Arbor, Mich. : University Microfilms International ISBN 13 : Total Pages : pages Book Rating :4.:/5 (82 download)
Book Synopsis Discount Rate Variations and Negative Autocorrelation in Asset Returns [microform] by : Mario Lavallée
Download or read book Discount Rate Variations and Negative Autocorrelation in Asset Returns [microform] written by Mario Lavallée and published by Ann Arbor, Mich. : University Microfilms International. This book was released on 1990 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Foreign Exchange Value of the Dollar by :
Download or read book Foreign Exchange Value of the Dollar written by and published by . This book was released on 1984 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Theories of Liquidity by : Dimitri Vayanos
Download or read book Theories of Liquidity written by Dimitri Vayanos and published by Now Pub. This book was released on 2012-10 with total page 112 pages. Available in PDF, EPUB and Kindle. Book excerpt: Theories of Liquidity surveys the theoretical literature on market liquidity focusing on six main imperfections studied in that literature: participation costs, transaction costs, asymmetric information, imperfect competition, funding constraints, and search. The authors address three basic questions in the context of each imperfection: (a) how to measure illiquidity, i.e., the lack of liquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity affects expected asset returns. The theoretical literature on market liquidity often employs different modeling assumptions when studying different imperfections. Instead of surveying this literature in a descriptive manner, Theories of Liquidity uses a common, unified model to study all six imperfections that are considered, and for each imperfection addresses the three basic questions within that model. The model generates many of the key results shown in the literature. It also serves as a point of reference for surveying other results derived in different or more complicated settings, and for describing fruitful areas for future research.This survey is related to both market microstructure and asset pricing. It emphasizes fundamental market imperfections covered in the market microstructure literature, and examines how these relate to empirical measures of illiquidity used in that literature. It also examines how market imperfections affect expected asset returns - an asset-pricing exercise - and, in that sense, connects the two areas of research.
Book Synopsis A Comparison of Discount Rate Models Using International Stock Market Data by : Kenneth Allan Kasa
Download or read book A Comparison of Discount Rate Models Using International Stock Market Data written by Kenneth Allan Kasa and published by . This book was released on 1994 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Asset Pricing at the Millenium by : John Y. Campbell
Download or read book Asset Pricing at the Millenium written by John Y. Campbell and published by . This book was released on 2000 with total page 86 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Risk-Free Discount Rates and Stock Returns by : Aurelija Griskaite
Download or read book Risk-Free Discount Rates and Stock Returns written by Aurelija Griskaite and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This research examines the ability of Earnings less Risk-free Interest Charge (ERIC) to predict stock returns. We find that that earnings, cash flow, and total income are more strongly associated with stock returns than ERIC or residual income. In conclusion, our research suggests that mandatory metrics typically outperform ERIC and residual income.
Book Synopsis Why Do Discount Rates Vary? by : Serhiy Kozak
Download or read book Why Do Discount Rates Vary? written by Serhiy Kozak and published by . This book was released on 2019 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: The price of discount rate risk reveals whether increases in equity risk premia represent good or bad news to rational investors. Employing a new empirical methodology, we find that the price is negative, which suggests that discount rates are high during times of high marginal utility of wealth. Our approach relies on using future realized market returns to consistently estimate covariances of asset returns with the market risk premium. Covariances drive observed patterns in a broad cross section of stock and bond expected returns.
Book Synopsis Corporate Discount Rates by : Niels Joachim Gormsen
Download or read book Corporate Discount Rates written by Niels Joachim Gormsen and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Standard theory implies that the discount rates used by firms in investment decisions (i.e., their required returns to capital) determine investment and transmit financial shocks to the real economy. However, there exists little evidence on how firms' discount rates change over time and affect investment. We construct a new global database based on manual entry from conference calls. We show that, on average, firms move their discount rates with the cost of capital, but the relation is far below the one-to-one mapping assumed by standard theory, with substantial heterogeneity across firms. This pattern leads to time-varying wedges between discount rates and the cost of capital. The average wedge has increased substantially over the last decades as the cost of capital has dropped. Future investment is negatively related to discount rates and discount rate wedges, but more weakly related to the cost of capital because of the limited transmission into discount rates. Moreover, the large and growing discount rate wedges can account for the puzzle of "missing investment" (relative to high asset prices) in recent decades. We find that beliefs about value creation combined with market power, along with fluctuations in risk, explain changes in discount rate wedges over time.
Book Synopsis Valuation Approaches and Metrics by : Aswath Damodaran
Download or read book Valuation Approaches and Metrics written by Aswath Damodaran and published by Now Publishers Inc. This book was released on 2005 with total page 102 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.
Book Synopsis CAPM and DCF by : Narayanaswamy Murugesan
Download or read book CAPM and DCF written by Narayanaswamy Murugesan and published by . This book was released on 2013 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: When Capital Asset pricing Model (CAPM) is considered as valid asset pricing theory, Security Market Line (SML) is supposed to give ex-ante returns for the single period investment horizon. Since the required returns should be same as the cost of equity (discount rates) in efficient markets, SML relationship is used for deriving cost of equity. Similarly, SML derived returns are used as parameter for performance evaluation like ascertaining alpha.This paper shows that the SML derived returns need not be same as implied discount rates even when CAPM is applicable and markets are efficient. This is because the stock returns and discount rates will be same mathematically only when the discount rates are expected to remain constant over the forecast period. The single period return of CAPM changes every year as the market changes with economic conditions implying that the market discount rates are changing. When the implied discount rates are varying, the ex-ante returns will have no resemblance to the implied discount rate for the year in consideration. This paper shows that the SML derived ex-ante returns may, if at all, only represent a geometric mean of the discount rates over a several investment periods into future. Similarly, the ex-ante returns can not be used for performance evaluation for single period investment horizon as it would only give the expected geometric mean of returns for the future periods making the concept of alpha evaluation erroneous.Similarly, when we extend this concept to equity risk premiums for the market, any historical risk premium can only be applicable for a similar period into the future. It is not possible to predict the equity risk premium for any individual year which again has implication for the surveys on equity risk premiums.The paper illustrates these ideas using two illustrations: Valuation of a firm using DCF Model with time-varying discount rates and Past Valuation data of S&P 500 using DDM Model.
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