Reliability and relevance of fair values: private equity investments and investee fundamentals

Review of Accounting Studies - We directly test the reliability and relevance of investee fair values reported by listed private equity funds (LPEs). In our setting, disaggregated fair value...     

Note on the behavior of residual security returns for winner and loser portfolios

Portfolios are formed directly and exclusively upon residual return behavior in the months prior to portfolio formation. The empirical behavior of residual return in the post-formation period is then examined. Based upon the overall time period studied (1932 through 1977), the average residual return is essentially zero in the months subsequent to the portfolio formation. However, systematic (i.e., non-zero) residual behavior is observed in particular years. Moreover, the results suggest the possibility that ‘abnormal’ returns observed after certain events (e.g., earnings announcements) may at least in part reflect more general phenomena associated with being ‘winners’ and ‘losers’ in terms of residual returns in the months previous to the event.     

Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation

Abstract:  This study addresses three research questions relating to total exclusions, special items, and other exclusions. Are each of these pro forma exclusion components forecasting irrelevant? Are each of the exclusion components value irrelevant? Are the valuation multiples on the exclusion components justified by their ability to forecast future profitability as predicted by the Ohlson (1999) model? Findings are generally consistent with the market-inefficiency results presented in Doyle et al. (2003) . Total exclusions are valued negatively by the market despite the prediction that total exclusions will be valued positively. Valuation results also suggest that stocks with positive other exclusions are overpriced.     

Accruals,Cash Flows,and Equity Values

We find, as predicted, that the differential ability of accrual and cash flow components of earnings to help forecast future abnormal earnings and the persistence of the components result in the components having different valuation implications. We base our tests on Ohlson (1999) applied to fourteen industries. We find: (1) Accruals and cash flows aid in forecasting future abnormal earnings incremental to abnormal earnings and equity book value. (2) Accruals and cash flows provide explanatory power for equity market value incremental to equity book value and abnormal earnings. (3) There is evidence that accruals and cash flows valuation coefficients are consistent with the Ohlson model.     

Multivariate Tweedie lifetimes: the impact of dependence

Systematic longevity risk is increasingly relevant for public pension schemes and insurance companies that provide life benefits. In view of this, mortality models should incorporate dependence between lives. However, the independent lifetime assumption is still heavily relied upon in the risk management of life insurance and annuity portfolios. This paper applies a multivariate Tweedie distribution to incorporate dependence, which it induces through a common shock component. Model parameter estimation is developed based on the method of moments and generalized to allow for truncated observations. The estimation procedure is explicitly developed for various important distributions belonging to the Tweedie family, and finally assessed using simulation.     

The Tail Stein's Identity with Applications to Risk Measures

In this article, we examine a generalized version of an identity made famous by Stein, who constructed the so-called Stein's Lemma in the special case of a normal distribution. Other works followed to extend the lemma to the larger class of elliptical distributions. The lemma has had many applications in statistics, finance, insurance, and actuarial science. In an attempt to broaden the application of this generalized identity, we consider the version in the case where we investigate only the tail portion of the distribution of a random variable. Understanding the tails of a distribution is very important in actuarial science and insurance. Our article therefore introduces the concept of the “tail Stein's identity” to the case of any random variable defined on an appropriate probability space with a Lebesgue density function satisfying certain regularity conditions. We also examine this “tail Stein's identity” to the class of discrete distributions. This extended identity allows us to develop recursive formulas for generating tail conditional moments. As examples and illustrations, we consider several classes of distributions including the exponential family, and we apply this result to demonstrate how to generate tail conditional moments. This holds a large promise for applications in risk management.     

Elliptical families and copulas: tilting and premium; capital allocation

Elliptical copula measures with symmetrical marginals are proposed as a natural generalization of the elliptical family, which preserves the symmetrical character of marginals, but is more flexible in the choice of their shape parameters. The properties of these copulas are investigated and the elliptical copula tilting and corresponding premium are proposed as a natural tool for portfolio capital allocation. For the case of the multivariate normal family, such a tilting and premium coincide with the Esscher transform and premium.     

Translation-invariant and positive-homogeneous risk measures and optimal portfolio management

The problem of risk portfolio optimization with translation-invariant and positive-homogeneous risk measures, which includes value-at-risk (VaR) and tail conditional expectation (TCE), leads to the problem of minimizing a combination of a linear functional and a square root of a quadratic functional for the case of elliptical multivariate underlying distributions. In this paper, we provide an explicit closed-form solution of this minimization problem, and the condition under which this solution exists. The results are illustrated using the data of 10 stocks from NASDAQ/Computers. The distance between the VaR and TCE optimal portfolios has been investigated.