Accounting data and asset valuation: Theory

Firms and divisions which are not traded on organized exchanges are often valued without the benefit of market data. Accounting data is used instead. One suggested approach is to use accounting beta as a proxy for market return beta. In the context of the Arbitrage Pricing Theory, we provide a theoretical justification for such a procedure. Our results provide a set of sufficient conditions so that return betas and accounting betas are equal. Our results also suggest a general methodology for evaluating projects and untraded firms using accounting data. The method underlying the derivation here is very general and can be applied in deriving testable restrictions between fundamentals, broader in context than that of accounting variables.     

A credit scoring approach for the commercial banking sector

For managing credit risk, commercial banks use various scoring methodologies to evaluate the financial performance of client firms. This paper upgrades the quantitative analysis used in the financial performance modules of state-of-the-art credit scoring methodologies. This innovation should help lending officers in branch levels filter out the poor risk applicants. The Data Envelopment Analysis-based methodology was applied to current data for 82 industrial/manufacturing firms comprising the credit portfolio of one of Turkey's largest commercial banks. Using financial ratios, the DEA synthesizes a firm's overall performance into a single financial efficiency score—the “credibility score”. Results were validated by various supporting (regression and discriminant) analyses and, most importantly, by expert judgments based on data or on current knowledge of the firms.     

Price taking behavior and trading in options

Equilibrium prices of options are arbitrage prices in economies in which prices are determined endogenously and all agents are price takers. This paper shows that the price taking assumption in options' markets is unreasonable because a small agent can make huge gains by not being a price taker.     

A NOTE ON THE GENERALIZED MULTIBETA CAPM

The unified beta theory of Connor (1984) requires that the market portfolio be well diversified in a given factor structure. Wei (1988) extended Connor's results without relying on this assumption. This note provides an alternative to Wei's result by assuming that residuals from the projection of asset return on a set of k factors follow a joint elliptical distribution.