Valuation of Callable Warrants

A simple valuation model for callable warrants is derived and tested. The model is expressed in closed form except for one term which can be evaluated numerically. Predictions of 78 warrant prices are compared to market prices and the average error is -.224 percent. By contrast, the Black-Scholes model applied to the same warrants produces an average error of 31.44 percent. Thus the callability feature cannot safely be ignored in determining warrant values.     

Opciones reales: una propuesta para valorar proyectos de I+D en centros públicos de investigación agraria

Investment decisions in research and development (R&D) are important to the success of organizations, especially for public research. This paper evaluates an R&D project (seed breeding) using the traditional method, the Net Present Value, and the more contemporaneous technique of real options. Economic Surplus Theory and Monte Carlo simulations are used to estimate social benefits. The results indicate that the real-options approach is a useful tool for assessing R&D public projects.     

Unsmoothing Commercial Property Returns: A Revision to Fisher–Geltner–Webb's Unsmoothing Methodology

Fisher, Geltner, and Webb (1993), in a highly influential paper, develop a procedure to recover the underlying market values from a smoothed valuation-based commercial property return index, without assuming that the underlying property market is informationally efficient. Many papers since then have used the Fisher–Geltner–Webb unsmoothing technique to desmooth commercial property returns. We show, however, that there is an inherent bias in Fisher–Geltner–Webb unsmoothing technique and propose a simple extension of their model to correct for this bias. We then compare the performance of our improved specification to that of the Fisher–Geltner–Webb model.     

Pricing the Credit Risk of Secured Debt and Financial Leasing

Abstract:  This paper presents closed form solutions to price secured bank loans and financial leases subject to default risk. Secured debt fair credit spreads always increase in the debtor's default probability, whereas financial leasing fair credit spreads may well decrease in the lessee's default probability and even be negative. The reason is that the lessor, unlike the secured lender, can gain from the lessee's default, especially when the leasing contract envisages initial prepayments or the lessee's terminal options to either purchase the leased asset or to extend the lease maturity. This result, which critically depends on contractual and bankruptcy code provisions, can explain some of the empirical evidence and the use of financial leases as an alternative to secured bank lending to finance small, risky and relatively opaque firms.     

Assessing the Real Estate Pricing Puzzle: A Diagnostic Application of the Stochastic Discounting Factor to the Distribution of REIT Returns

This article applies a general asset-pricing framework and the volatility bounds methodology of Hansen and Jagannathan (1991) to REIT returns. The state of real estate asset pricing remains somewhat of a puzzle relative to the identification of state variables and the structural form of models. This article offers a framework whereby real estate asset-pricing models and data can be diagnosed to answer questions about the shortcomings. In addition, several nominated discount processes are investigated for success in pricing real estate securities. Although the nominated specifications demonstrate some success in satisfying the restrictions on the first and second moments of the real estate returns distribution, they do not successfully price the securities under a no-arbitrage condition. This result calls into question previous real estate performance studies that employ these risk-adjustment processes.     

Electricity Pricing in New Zealand and the Australian State of Queensland: Accounting for the Impact of Sector Restructuring

The electricity industries of New Zealand (NZ) and the Australian state of Queensland have undergone substantial structural and regulatory reform with the common intent to improve economic efficiency. Deregulation and privatisation have been key elements of the reform but have been approached differently by each jurisdiction. This study traces the link between structural and regulatory regimes and asset valuation, profits and, ultimately, pricing. The study finds that key drivers in recent price increases are the government‐owned generation and retail sector in NZ and the government‐owned distribution sector in Queensland. It is concluded that, contrary to the rationale for the imposition of regulatory controls in a non‐market environment, the regulatory regimes appear to have contributed to higher rather than lower pricing structures.     

资产定价:理论演进及应用研究

资产定价理论是现代金融理论的核心.本文通过对资产定价理论的综述,揭示了从传统资产定价理论到行为资产定价理论的演进脉络,并对各理论及相应模型的内涵和应用进行了描述,最后对传统资产定价理论和行为资产定价理论进行了比较,以期对我国金融理论和实践的发展有所帮助.     

Economic Risk Factors and Commercial Real Estate Returns

A great deal of research has focused on the links between stock and bond market returns and macroeconomic events such as fluctuations in interest rates, inflation rates, and industrial production. Although the comovements of real estate and other asset prices suggests that these same systematic risk factors are likely to be priced in real estate markets, no study has formally addressed this issue. This study identifies the growth rate in real per capita consumption, the real T-bill rate, the term structure of interest rates, and unexpected inflation as fundamental drivers or state variables that systematically affect real estate returns. The finding of a consistently significant risk premium on consumption has important ramifications for the vast literature that has examined the (risk-adjusted) performance of real estate, for it suggests that prior findings of significant abnormal returns (either positive or negative) that have ignored consumption are potentially biased by an omitted variables problem. The results also have important implications for dynamic asset allocation strategies that involve the predictability of real estate returns using economic data.     

Generalised Geske--Johnson Interpolation of Option Prices

Abstract:  This paper describes four separate option types as special cases of Bermudans with general inter–exercise and time to final maturity. This produces a surface with European, finite American, infinite Bermudan and infinite American options as special cases. This allows Geske–Johnson (1984) two–point pricing to be extended to consider time–to–maturity as well as time–between–exercise opportunities. Due to their position on this 'map', infinite Bermudans are christened Arctic options and their pricing solution is presented. Numerical comparisons to benchmark methods are made for call prices under GBM although the results here hold for other processes and for both puts and calls when symmetry arguments are invoked.     

Commercial Real Estate Return Performance: A Cross-Country Analysis

This paper investigates the return performance of publicly traded real estate companies. The analysis spans the 1984–1999 time period and includes return data on over 600 companies in 28 countries. The return data reveal a substantial amount of variation in mean real estate returns and standard deviations across countries. Moreover, standard Treynor ratios, which scale country excess returns by the estimated beta on the world wealth portfolio, also reveal substantial variation across countries in excess real estate returns per unit of systematic risk. However, when we estimate Jensens alphas using both single and multifactor specifications, we detect little evidence of abnormal, risk-adjusted returns at the country level. We do, however, find evidence of a strong world-wide factor in international real estate returns. Furthermore, even after controlling for the effects of world-wide systematic risk, an orthogonalized country-specific factor is highly significant. This suggests that real estate securities may provide international diversification opportunities.     

The Cross-Section of Expected Stock Returns: New Evidence from an Emerging Market

Over 300 factors have been found to explain the cross-section of expected stock returns. Empirical studies also show that findings from multifactor asset-pricing models have not been consistent in an emerging market. Using DuPont analysis and a residual income valuation model for 284 nonfinancial companies on Ho Chi Minh Stock Exchange during the period 2008–2014, findings suggest that the return on equity and its change are informative for stock returns in Vietnam. In addition, the level of capital turnover, financial cost ratio (FCR), and changes in capital and in the FCR contain incremental explanatory power for stock returns.     

C-CAPM Refinements and the Cross-Section of Returns

This paper studies if the consumption-based asset pricing model can explain the cross-section of expected returns. The CRRA model and several refinements (habit persistence and idiosyncratic shocks) all imply that the conditional expected return is linearly increasing in the asset’s conditional covariance with consumption growth. Results from quarterly data on the 25 Fama-French portfolios suggest that the model has serious problems: there are large and systematic pricing errors. In addition, the estimated time-varying effective risk aversion coefficients appear implausible and are unrelated with most candidates for habit persistence and idiosyncratic risk.     

The pricing of sentiment risk in European stock markets

This paper studies whether sentiment is rewarded with a significant risk premium in the European stock markets. We examine several sentiment proxies and identify the Economic Sentiment Indicator from the EU Commission as the most relevant sentiment proxy for our sample. The analysis is performed for the contemporaneous excess returns of EA-11 stock markets in the period from February 1999 to September 2015. We apply a conditional multi-beta pricing model in order to track the variation of the sentiment risk premium over time. The results demonstrate a positive significant relationship between sentiment and contemporaneous excess returns which is consistent with previous studies. The calculated sentiment risk premium is significant as well but negative implying that an investment in EA-11 countries over the examined time period – that is bearing sentiment risk – would have been unattractive to the investors on average.