Risk and Return: A Revisit Using Expected Returns

This paper uses direct estimates of expected returns to examine the link between standard measures of financial risk and investor return requirements. The results show that systematic risk commands a significant positive risk premium, much larger than found using historical returns as proxies for expectations. Furthermore, there are nonlinearities in the relationship between risk and return. Finally, we show that expected returns and risk premiums in the equity markets change over time and that these changes are related to changes in interest rates on U.S. government obligations.     

Investment Dynamics and Earnings‐Return Properties: A Structural Approach

We propose the standard neoclassical model of investment under uncertainty with short‐run adjustment frictions as a benchmark for earnings‐return patterns absent accounting influences. We show that our proposed benchmark generates a wide range of earnings‐return patterns documented in accounting research. Notably, our model generates a concave earnings‐return relation, similar to that of Basu [1997], and predicts that the earnings‐return concavity increases with the volatility of firms’ underlying shock processes and decreases with the level of firms’ investments. We find strong empirical support for these predictions. Overall, our evidence suggests that our proposed benchmark is useful for understanding the joint dynamics of variables of interest to accounting research (e.g., earnings, returns, investment, market‐to‐book) absent accounting influences, a necessary precondition for inferring the effects of accounting from these dynamics.     

A Simple Formula for the Expected Rate of Return of an Option over a Finite Holding Period

Under conditions consistent with the Black-Scholes formula, a simple formula is developed for the expected rate of return of an option over a finite holding period possibly less than the time to expiration of the option. Under these conditions, surprisingly, the expected future value of a European option, even prior to expiration, is shown equal to the current Black-Scholes value of the option, except that the expected future value of the stock at the end of the holding period replaces the current stock price in the Black-Scholes formula and the future value of a riskless invesment of the striking price replaces the striking price. An extension of this result is used to approximate moments of the distribution of returns from an option portfolio.     

Capital and Risk Revisited: A Structural Equation Model Approach for Life Insurers

The role of risk in the capital structure decision of firms is a vast topic in finance. Commonly, models of the interrelationship between risk and capital enumerate as many risk factors as possible by appropriate proxies, with the goal of detailing their individual effects. In this study of the life insurance industry for 1994 through 2000, we take a broader, holistic view of enterprise risk, identifying two groups of insurer risk factors that arise from the major activities of life insurers: investing and underwriting. We call the group of risk factors associated with investing asset risk, and the group associated with underwriting product risk. After specifying other important determinants of capital structure as controls, we allow all other risk factors to find expression in residual error. Within this framework, our focus is to compare two candidate measures for the role of proxy for asset‐related risks. One measure, called regulatory asset risk (RAR), derives from the regulatory tradition of concern with solvency and is related to the C‐1 component of risk‐based capital. The other measure, called opportunity asset risk (OAR), is motivated by traditional finance concerns with market risk and reflects volatility of returns. Product‐related risks are proxied by underwriting exposures in different product lines. We employ structural equation modeling (SEM), which uses longitudinal factor analysis. SEM is an innovative technique for such studies, in dealing effectively with multiple structural equations, autocorrelated panel data, unobserved underlying factors, and other issues that are not simultaneously addressed in other methodologies. We find that RAR and OAR are not equivalent proxies for asset risks. Although overlapping to some extent, each illuminates different aspects of the asset risk–capital interrelationship. In particular, RAR does not seem to affect the capital structure decision of small firms, although OAR does. We interpret this to suggest that small firms as a whole are not as sensitive in their capital decisions to the proxy of regulatory concerns as to the proxy of market opportunity. This contrasts with large insurers, for whom both RAR and OAR have significant effects on capital that comport with the finite risk hypothesis. More detailed analysis suggests that the lack of effect of RAR for small insurers may result from RAR's proxying some factors that induce finite risk for part of the small insurer sample, and other factors that favor the excessive risk hypothesis.     

Contingent Factors,Extent of Budget Use and Performance: A Structural Equation Approach

The present study investigates the contextual factors that impact the extent of budget use and performance based on contingency theory. For this purpose, we carried out a questionnaire survey of Turkish firms. In order to analyse the data, confirmatory factor analysis and covariance‐based structural equation modelling were used. We find that the extent of budget use and performance are affected significantly by contextual factors. Size, structure, perceived environmental uncertainty (PEU) and information technology (IT) determine the extent of budget use. The study also finds that performance is significantly affected by the extent of budget use and other contingent factors (i.e., structure, PEU, functionality of IT). Furthermore, there is a mediating role of budget use between contextual factors and performance.     

Effect of Analysts' Optimism on Estimates of the Expected Rate of Return Implied by Earnings Forecasts

Recent literature has used analysts' earnings forecasts, which are known to be optimistic, to estimate implied expected rates of return, yielding upwardly biased estimates. We estimate that the bias, computed as the difference between the estimates of the implied expected rate of return based on analysts' earnings forecasts and estimates based on current earnings realizations, is 2.84%. The importance of this bias is illustrated by the fact that several extant studies estimate an equity premium in the vicinity of 3%, which would be eliminated by the removal of the bias. We illustrate the point that cross‐sample differences in the bias may lead to the erroneous conclusion that cost of capital differs across these samples by showing that analysts' optimism, and hence, bias in the implied estimates of the expected rate of return, differs with firm size and with analysts' recommendation. As an important aside, we show that the bias in a value‐weighted estimate of the implied equity premium is 1.60% and that the unbiased value‐weighted estimate of this premium is 4.43%.     

基于门限回归模型的利率期限结构预期假说分析

利率期限结构的预期假说是否成立在中国债券市场上至今仍无定论。采用2002年2月至2006年10月的月度数据,运用门限回归模型分析通货膨胀与我国债券市场上的利率期限结构预期假说存在的关系,实证结果表明,通货膨胀确实能够影响预期假说的成立,并且通胀门限值为3.9。进一步得出,低通胀条件下,预期假说成立;高通胀条件下,预期假说不成立。这说明央行在制定货币政策和推进利率市场化改革过程中需要审时度势,根据现有通货膨胀情况有效制定货币政策以稳定宏观经济运行。     

Future Realized Return,Firm‐specific Risk and the Implied Expected Return

In this paper, I propose a novel approach to derive a firm‐specific measure of expected return. It builds on recent accounting‐based valuation models developed by Clubb (2013) and Ashton and Wang (2013). The measure is intrinsically linked to commonly used financial ratios, including book‐to‐market, (forward) earnings yield, and dividend‐to‐price, as well as growth and past returns. The empirical evidence shows that it is significantly positively associated with future realized stock returns and also significantly correlated with commonly used risk characteristics in a theoretically predictable manner. The results are likely to be of interest to practitioners and managers in making capital allocation decisions and to academics in need of proxies for firms’ discount rates and expected returns.     

存货款相关因素影响预期收益的敏感性分析

利率、存贷款收付息率、利差、存贷款规模与结构等因素对一个银行收益变化起着重要的影响作用，本文试通过分析银行预期收益随之变化的影响程度和敏感性程度，依此提醒我们，在实际工作中应关注存贷比与存贷差、关注存款结构与成本、关注贷款定价科学性及关注客户经理存贷款业务考核。     

The Expected Return and Exercise Time of Merton-style Real Options

We analyse the rate of return and expected exercise time of Merton-style options (1973) employed in many real option situations where the possibility of exercise is both perpetual and American in nature. Using risk-neutral and risk-adjusted pricing techniques, Merton-style options are shown to have an expected return that is a constant percentage of the option value and independent of the proximity to the critical exercise boundary. Merton options thus remain at the same point on the Security Market Line, unlike European options whose position and rate of return change dynamically. We also present formulae for the expected time and discounted times to exercise and analyse the dependency of these variables on volatility.     

基于结构方程模型的高校课堂教学质量评价研究

将结构方程模型方法用于高校课堂教学质量研究,可以借助观测模型和结构模型来探索潜变量及其相互间的因果关系、路径系数和权重。本文基于教师评价视角,对某高等学校课堂教学质量调查,对构成课堂教学质量及其因果变量的相互关系进行分析和模型的路径设计,构建了高校课堂教学质量模型,并借助LISREL8.7软件进行了效应分析,证实模型有较好的拟合度,使课堂教学质量评价的结果更加准确、合理和可信。     

Estimating the Equity Risk Premium and Expected Equity Rates of Return: The Case of Canada

It is common to use the average excess return of equities over bonds estimated over long time periods as an expected equity risk premium on the grounds that going back far enough covers most possible economic scenarios. But although this data is useful in guiding the exercise of judgment, it cannot substitute for judgment. Adding more years of data to the near century of Canadian stock and bond returns that inform today's estimate of the equity risk premium will not produce a “random walk” for a simple reason: the historic bond series is the result of a specific historic monetary policy. This is particularly true of and important for the case of Canada, where today's very low current bond yields reflect the emergence of the Canadian dollar as a reserve currency as well as the impact of unconventional monetary policy elsewhere. After analyzing the historic record of the Canadian equity risk premium and noting the need for adjustments when this premium is applied to the current anomalously low Canadian long‐term bond yields, the author reaches the following conclusions:

• The historic Canadian equity risk premium is approximately 5.0% (based on arithmetic returns), which is slightly lower than the roughly 6.0% value for the U.S.
• The historic equity risk premium has not been constant because of obvious changes in the Canadian bond market. To some extent, the huge cycle in which bond yields began their increase from the 4.0% level starting in 1957, when markets were liberalized, and then fell back to the 4.0% level in 2007‐2008 completed an adjustment to changes in fiscal versus monetary policy. However, in 2016, average long Canada bond yields dropped to an anomalously low 1.8%, which is below the long‐term inflation target of the Bank of Canada, and have barely recovered since. It is difficult to view this as an equilibrium rate determined by private investors.
• Of the drop in bond yields, about 0.50% is unique to Government of Canada bonds as they became attractive to sovereign investors as a rare AAA‐rated issuer.
• Using an indicator variable for the post‐2010 years, a simple regression analysis indicates that current long Canada bond yields should be about 2.75% higher but for the recent changes. And for 2018, this means that the 2.35% average long Canada bond yield should have been about 5.0%. Apart from the impact of higher government deficits, this is consistent with average yields before the 2008 financial crisis.
• Adding an adjusted 5.0% long Canada bond yield to the historic equity risk premium in Canada of 4.50% gives 9.50% for the cost of the overall equity market or, given the Bank of Canada's target inflation rate of 2.0%, a real equity return of 7.5%, both slightly higher than the long‐run averages.

In sum, the conventional practice of adding a historic market risk premium to the current low Canada long bond yields would impart a sharp downward bias to current equity cost estimates; use of this method would not be appropriate until long Canada bond yields increase to at least the 4.0% level.     

The Fisher Equation: A Nonlinear Panel Data Approach

This article reinvestigates the Fisher equation. Using the panel smooth transition regression (PSTR) model, it was found that there is a significant regime-switching effect concerning the impact of inflation on interest rates. Specifically, inflation is found to raise the interest rates and the effect becomes stronger in magnitude with inflation. However, the data do not provide evidence in support of the one-for-one Fisher effect. The evidence is robust to interest rates with different maturities and subsamples.