Intangible Asset Valuation Model Using Panel Data

In this paper, we design a valuation model for intangible assets using panel data, and empirically investigate the model validity. The approach using panel data is an evaluation method that uses unobserved firm-specific effects based on panel analysis. Our model first estimates production function using panel analysis, and then develops cost function using a duality approach. Next, we discount added value and costs resulting from intangible assets using fixed effects. Empirical analysis using the model compares the estimated parameter values in the nonlinear profit function consisting of production function and cost function with those in the production function alone, which becomes linear after logarithmic conversion, and finds that the two are generally similar. Additionally, the market value of equity is more closely associated with both the book value of equity and the value of intangible assets than with the book value of equity alone. These results support the validity of the model for evaluating intangible assets. This model is easy to apply in practice and is based on a simple idea. Further discussion of this model is warranted given the increasing importance attached to the value of intangible assets.     

Markets and institutions in financial intermediation: National characteristics as determinants

Given the importance of financial intermediation and the rise of globalization, there is little prior research on how national preferences for financial intermediation (markets versus institutions) are determined by cultural, legal, and other national characteristics. Using panel analysis for data on a recent 8-year period for 30 countries, this paper documents that national preferences for market financing increase with political stability, societal openness, economic inequality, and equity market concentration, and decreases with regulatory quality and ambiguity aversion. We confirm with robustness tests that our result for regulatory quality is independent of differences in national wealth and that our result for political stability is independent of both wealth and political legitimacy. These results should be of much interest to managers, scholars, regulators, and policy makers.     

The independence axiom and asset returns

This paper integrates models of atemporal risk preference that relax the independence axiom into a recursive intertemporal asset-pricing framework. The resulting models are amenable to empirical analysis using market data and standard Euler equation methods. We are thereby able to provide the first nonlaboratory-based evidence regarding the usefulness of several new theories of risk preference for addressing standard problems in dynamic economics. Using both stock and bond returns data, we find that a model incorporating risk preferences that exhibit first-order risk aversion accounts for significantly more of the mean and autocorrelation properties of the data than models that exhibit only second-order risk aversion. Unlike the latter class of models which require parameter estimates that are outside of the admissible parameter space, e.g., negative rates of time preference, the model with first-order risk aversion generates point estimates that are economically meaningful. We also examine the relationship between first-order risk aversion and models that employ exogenous stochastic switching processes for consumption growth.     

The role of data limitations,seasonality and frequency in asset pricing models

We demonstrate that the estimates of the Capital Asset Pricing Model (CAPM) parameters significantly differ across samples, which are based on different days of the week (representing different seasons). Our evidence suggests that the “noise” in the data is not an issue. We also show that parameter differences for mixed samples, which contain information on different seasons, are too small to distort statistical analysis. This is so because parameter estimates converge to some values (but not necessarily to the true values) for high frequencies or as the sample size becomes large. Our evidence suggests a possibility that the CAPM may hold empirically if seasonality in the parameters of the population model are taken into consideration.     

EMPIRICAL EVIDENCE ON THE IMPACT OF THE BID-ASK SPREAD ON THE CHARACTERISTICS OF CRSP DAILY RETURNS

It is widely recognized that Center for Research in Security Prices (CRSP) returns may differ from “true” returns because of the bid-ask effect. Using a large sample of New York Stock Exchange and American Stock Exchange securities, I confirm a discernible bid-ask effect, the magnitude and importance of which decrease with the security's price level (increase with the spread). I find volatility estimates using CRSP returns to be greater than those based on quote returns. However, market model properties, such as β and R², are generally unaffected. Bid-ask effects are clearly apparent in event studies, but because of certain offsetting effects commonly used test statistics remain unaffected. Low-priced stocks (below $2.00) do not conform to these patterns. Finally, the evidence raises the possibility that the existing literature on filter rule tests may underestimate the bid-ask spread component of transaction costs.     

Incomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?

This paper investigates Euler equations involving security prices and household-level consumption data. It provides a useful complement to many existing studies of consumption-based asset pricing models that use a representative-agent framework, because the Euler equations under investigation hold even if markets are incomplete. It also provides a useful complement to simulation-based studies of market incompleteness. The empirical evidence indicates that the theory is rejected by the data along several dimensions. The results therefore indicate that some well-documented asset-pricing puzzles do not result from aggregation problems for the preferences under investigation.     

Determinants of financial stress in emerging market economies

The global financial crisis of 2008–2009 illustrates how financial turmoil in advanced economies could trigger severe financial stress in emerging markets. Previous studies dealing with financial crises and contagion show the linkages through which financial stress are transmitted from advanced to emerging markets. This paper extends the existing literature on the use of financial stress index (FSI) in understanding the channels of financial transmission in emerging market economies. Using FSI of 25 emerging markets, our panel regression estimates show that not only advanced economies FSI, but also regional and nonregional emerging market FSIs significantly increase domestic financial stress. Our findings also suggest that there is a common regional factor significantly affecting domestic FSI in emerging Asia and emerging Europe. Furthermore, the results from a structural vector autoregression model with contemporaneous restrictions indicate that although a domestic financial shock still accounts for most of the variation in domestic FSI, regional shocks play an important role in emerging Asia.     

Option values under stochastic volatility: Theory and empirical estimates

This paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility. Statistical estimators for volatility process parameters are derived, and parameter estimates are calculated for several individual stocks and indices. The resulting estimated option values do not differ dramatically from Black-Scholes values in most cases, although there is some evidence that for longer-maturity index options, Black-Scholes overvalues out-of-the-money calls in relation to in-the-money calls.     

Do government preferences matter for tax competition?

This paper explores how government preferences affect capital tax decisions of a country. We develop a model in which governments, differentiating in their preferences for economic development and income equality, compete for mobile capital over corporation taxes. The key prediction of the model, borne out in data from OECD countries over the years 1990–2012, is that an increase in government preferences for pursuing economic development relative to income equality makes countries’ horizontal tax reactions stronger. Unlike the existing studies, our result contributes to the tax competition literature by highlighting the importance of government preferences in determining the extent of tax competition among countries and so offering a novel explanation for the widely observed heterogeneous tax policies across countries.     

Learning, Asset-Pricing Tests, and Market Efficiency

This paper studies the asset-pricing implications of parameter uncertainty. We show that, when investors must learn about expected cash flows, empirical tests can find patterns in the data that differ from those perceived by rational investors. Returns might appear predictable to an econometrician, or appear to deviate from the Capital Asset Pricing Model, but investors can neither perceive nor exploit this predictability. Returns may also appear excessively volatile even though prices react efficiently to cash-flow news. We conclude that parameter uncertainty can be important for characterizing and testing market efficiency.     

The Net Benefits to Leverage

I estimate the market's valuation of the net benefits to leverage using panel data from 1994 to 2004, identified from market values and betas of a company's debt and equity. The median firm captures net benefits of up to 5.5% of firm value. Small and profitable firms have high optimal leverage ratios, as predicted by theory, but in contrast to existing empirical evidence. Companies are on average slightly underlevered relative to the optimal leverage ratio at refinancing. This result is mainly due to zero leverage firms. I also look at implications for financial policy.     

Measuring informational efficiency of the European carbon market — A quantitative evaluation of higher order dependence

This paper introduces a new method for measuring nonlinear predictability in financial price changes: the so-called intermittency coefficient, a parameter of the multifractal random walk model by Bacry et al. (2001). As the intermittency coefficient can quantify the degree of nonlinear deviation from a random walk, we employ its estimates from financial data as a proxy for the loss of financial market efficiency. In addition, we propose a new statistical test of the random walk hypothesis. In an empirical application using data from the largest currently existing market for tradable pollution permits, the European Union Emissions Trading Scheme (EU ETS), we show that the degree of efficiency of this market remains largely unchanged over the period of observation 2008–2019. This suggests that the market has reached a mature state: informational efficiency in Phase III remains at a level comparable to Phase II. What is more, the EU ETS is found to be more efficient than the US stock market. This result, surprising as such, is largely attributable to the lower exposure to global economic shocks of the EU ETS.     

Estimating the Cost of Equity for Property-Liability Insurance Companies

Due to the highly skewed and heavy‐tailed distributions associated with the insurance claims process, we evaluate the Rubinstein‐Leland (RL) model for its ability to improve the cost of equity estimates of insurance companies because of its distribution‐free feature. Our analyses show that there is as large as a 94‐basis‐point difference in the estimated cost of insurance equity between the RL model and the capital asset pricing model (CAPM) for the sample of property‐liability insurers with more severe departures from normality. In addition, consistent with our hypotheses, significant differences in the market risk estimates are found for insurers with return distributions that are asymmetrically distributed, and for small insurers. Third, we find significant performance improvements from using the RL model by showing smaller values of excess return of the expected return of the portfolio to the model return for a portfolio of insurers with returns that are more skewed and for a portfolio of small insurers. Finally, our panel data analysis shows the differences in the market risk estimates are significantly influenced by firm size, degree of leverage, and degree of asymmetry. The implication is that insurers should use the RL model rather than the CAPM to estimate its cost of capital if the insurer is small (assets size is less than $2,291 million), and/or its returns are not symmetrical (the value of skewness is greater than 0.509 or less than ?0.509).     

Seasonality and Consumption-Based Asset Pricing

Most of the evidence on consumption-based asset pricing is based on seasonally adjusted consumption data. The consumption-based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time-separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures.     

Temptation and Self‐Control: Some Evidence and Applications

This paper studies the empirical relevance of temptation and self‐control using household‐level data from the Consumer Expenditure Survey. We construct an infinite‐horizon consumption‐savings model that allows, but does not require, temptation and self‐control in preferences. In the presence of temptation, a wealth–consumption ratio, in addition to consumption growth, becomes a determinant of the asset‐pricing kernel, and the importance of this additional pricing factor depends on the strength of temptation. To identify the presence of temptation, we exploit an implication of the theory that a more tempted individual should be more likely to hold commitment assets such as individual retirement account (IRA) or 401(k) accounts. Our estimation provides empirical support for temptation preferences. Based on our estimates, we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle.     

Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return

A number of studies have shown that the variance risk premium (VRP), defined as the difference between risk-neutral and physical expected variances, has strong predictive power for the excess stock market return, and this predictability peaks at 3- to 6-month prediction horizons. However, little research presents empirical evidences for Chinese stock market due to the absence of option market. Under general equilibrium asset pricing framework, this article estimates time-varying VRP using the Chinese stock market data. We find that the estimated VRP predicts the excess Chinese stock market return, and this forecasting power is stronger at 4- and 5-month horizons, which is consistent with the findings of existing literature.     

What’s wrong with Pittsburgh? Delegated investors and liquidity concentration

What makes an asset institutional quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate their investments in cities with higher turnover. It then estimates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid, even when assets have identical cash flows. The paper provides evidence for clientele equilibria arising in frictional asset markets and suggests that a liquidity channel may explain divergent paths in city development.     

The Q Theory of Housing Investment

This paper presents estimates of a Q model of housing investment, using quarterly data for the United States. The empirical model is estimated using building permits, housing starts, and housing investment expenditures as measures of investment. The current and lagged values of the Q ratio are found to be positively and significantly associated with housing investment, whichever way investment is measured. The findings suggest that the housing market indeed functions as Tobin has theorized. Housing suppliers appear to respond to the demands of housing consumers, building more new homes when existing home prices are high relative to new home prices.     

Simple estimators for the parameters of discrete dynamic games (with entry/exit examples)

We estimate parameters from data on discrete dynamic games, using entry/exit games to illustrate. Semiparametric first‐stage estimates of entry and continuation values are computed from sample averages of the realized continuation values of entrants and incumbents. Under certain assumptions, these values are easy‐to‐compute analytic functions of the parameters of interest. The entry and continuation values are used to determine the model's predictions for entry and exit conditional on the parameter vector, and the estimates compare these predictions with the data on entry and exit rates. Small‐sample properties are discussed and lead to the simplest of estimators.     

Consumer search and dynamic price dispersion: an application to gasoline markets

This article studies the role of imperfect information in explaining price dispersion. We use a new panel data set on the U.S. retail gasoline industry and propose a new test of temporal price dispersion to establish the importance of consumer search. We show that price rankings vary significantly over time; however, they are more stable among stations at the same street intersection. We establish the equilibrium relationships between price dispersion and key variables from consumer search models. Price dispersion increases with the number of firms in the market, decreases with the production cost, and increases with search costs.