Changes In Market Value Research Articles

Stock Volatility and the Crash of ’87

This article analyzes the behavior of stock return volatility using daily data from 1885 through 1988. The October 1987 stock market crash was unusual in many ways. October 19 was the largest percentage change in market value in over 29,000 days. Stock volatility jumped dramatically during and after the crash. Nevertheless, it returned to lower, more normal levels more quickly than past experience predicted. The author uses data on implied volatilities from call option prices and estimates of volatility from futures contracts on stock indexes to confirm this result. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

The Performance of Long-Term Contracts: Further Evidence from Coal Markets

This article extends my previous work on price adjustment in long-term coal contracts to cover a period in which the nominal market prices for coal were below the prices specified in the preexisting long-term contracts. Two related sets of questions are explored. First, did actual transactions prices for coal delivered pursuant to old contracts follow contractual pricing formulas, leading to higher rather than lower prices, or did they adapt quickly to changing market conditions? Second, what were the relative roles offormal contractual provisions, voluntary renegotiation, and breach of contractual promises in determining actual transactions prices, quantities, and the durability of contractual relations. It appears that actual transactions prices for coal delivered pursuant to old contracts were rigid downward, following written contractual provisions rather than changes in current market values. Changing economic conditions led to an increase in renegotiation, breach, and litigation, but the vast majority of existing long-term contracts endured through the market downturn without major changes in prices or quantities from those previously agreed to by contract. The threat of legal sanctions appears to have played an important role in sustaining contractual promises.

Gasoline Prices and the Used Automobile Market: A Rational Expectations Asset Price Approach

This paper examines the impact of changes in gasoline price expectations on the market values of used automobiles. An asset model of automobile valuation is used to relate year-to-year changes in market values to changes in the present discounted value of gasoline expenses. Econometric evidence from data covering the years 1972 through 1981 substantially confirms the hypothesis of the model that a gasoline price shock causes relative price changes across automobile types in proportion to the differences in their rates of fuel consumption.

Accounting for equity investments of life insurance companies*

Abstract. This paper deals with the accounting for equity investments by a life insurance company. Various procedures for recognizing unrealized changes in market values of securities in its investment portfolio are analyzed. These range from direct recognition of market values to the method currently employed by Canadian life insurance companies which involves extensive smoothing. Summary statistics are suggested that describe the properties of the resulting accounting numbers obtained from various smoothing procedures. These summary statistics are viewed as compact, cost effective ways of summarizing the effects of the procedures for financial statement readers. The second part of the paper describes how a particular user group can obtain a ranking among various accounting alternatives. The Analytic Hierarchy Process (Saaty 1980) is proposed for combining the judgments of different individuals into a group preference. The feasibility of the method is illustrated using a small pilot study to rank various proposals concerning the accounting treatment of life insurance companies' equity investments.

DYNAMICS IN THE STRUCTURAL FORM OF PROPERTY TAXES∗

Because the property tax is structurally tied to market values of dwellings through the assessment function, rapidly increasing market values may beget rapid increases in property taxes. Public awareness of this process was instrumental in California's 1978 passage of the Jarvis-Gann Amendment. Millage rates should be indexed to counterbalance changes in market values.

Economic Depreciation of the Residential Housing Stock of the United States, 1950-1970

B ECAUSE many capital assets lose value as they age, it is important both for tax policy and for national income and wealth accounting to be able to measure the pattern of this depreciation. The economic theory of depreciation was first presented by Harold Hotelling in 1925. There was a gap of fifty years before this seminal piece was developed in discussions of depreciation/replacement' rates by Jorgenson (1975) and by Hulten and Wykoff (1976). The desire to add together capital with different characteristics and of different vintages to form an aggregate usable in national wealth accounting stimulated further work in the estimation of depreciation patterns and rates. In 1969 Taubman and Rasche investigated depreciation for office buildings, while in 1970 Wykoff did likewise for automobiles. The purpose of this article is to present a technique for estimating depreciation/replacement rates for the residential stock of housing using data for the United States, 1950-1970, and to compare these estimates with rates calculated by others for specific types of residential housing. This research relies upon the following assumption made explicit in Wykoff (1970): all housing capital, regardless of type, depreciates in the same fashion. Though this assumption is called into question by the results of Wykoff's research for automobiles, it is not formally tested here because of data limitations. In addition, depreciation/replacement rates are calculated in two ways. The first uses benchmarks that reflect the change in price or market value of units over time only, and the second uses benchmarks that reflect this price change plus the cost of maintenance and repair expenditures for the units. In the following section the theory underlying the depreciation/replacement rate estimation technique is presented, and the calculation of benchmarks for housing units of new equivalents, an essential step in the process, is covered in detail. Section C contains comparisons of benchmarks and depreciation/replacement rate estimates, and in section D, conclusions are drawn from the research as a whole.

Discussion of On the Association between Net Monetary Position and Equity Security Prices

Robert Freeman proposes to investigate an aspect of general pricelevel accounting (GPLA): the effect of inflation on the value of corporations' net monetary position (NMP). This is not, however, what he actually investigates. His basic data are stock price changes, which are dominated by changes in expectations. General price-level accounting (GPLA) and current value accounting (CVA) deal with inflation in very different ways. GPLA addresses changes in the unit of account, whereas CVA attempts to reflect changes in market value. Because short-period changes in the real value of money-fixed claims of even modest duration are dominated by changes in expectations of future inflation, rather than by the impact of current inflation on the real value of the unit of account, any study of the impact of short-period changes on the corporate balance sheet is automatically in the province of CVA. In this respect, there is a minor problem with Freeman's use of NMP. If one is going to focus on changes in expectations, then, as Freeman realizes, duration becomes very important. But NMP adjusted for the durations of the relevant balance-sheet items really is no longer net monetary position: the adjustments can and often will change not merely the magnitude of NMP, but also its sign. This problem persists deep into the paper. A second problem with Freeman's choice of GPLA as the motivating framework for the present study is that GPLA attempts to reflect changes in the real value of assets and liabilities presented in the balance sheet in nominal terms. Yet by focusing on changes in nominal share values, the author is addressing the impact of changes in the nominal value of real assets and liabilities. But even if one chooses to view Freeman's paper (which, as noted, focuses on expectations) as a study of inflation-related aspects of CVA, rather than GPLA, it still has a serious conceptual problem. Freeman

An Empirical Investigation of the Extent of Tax Discounting: Comment

In the last two decades a considerable controversy has centered around the discounting of future taxes for servicing the national debt. With the exception of the Tanner [7] and Kochin [3] studies, researchershave concentratedonthe theoretical aspects of the discounting issue (see [2, 9] ). The purpose of our study is to develop a valid methodology that allows us to measure the contribution of the debt to perceived private sector wealth. Our approach differs from Tanner and Kochin in two major ways: (1) we obtain an estimate of tax discounting by employing a properly specified aggregate consumption function and, (2) we generate a time series for market value of the debt which takes proper account of capital gains and losses from interest rate changes. Section 1 contains a discussion of the Tanner and Kochin studies, with special emphasis on their methodological shortcomings. In the next section we develop and test our model. Our results on the tax discounting issue are in sharp contrast with those reported by Tanner in this journal. Using Canadian data, Tanner found that taxes are almost completely discounted. In Section 1 we identify the feature of Tanner's methodology that leads him seriously to overestimate the extent of tax discounting. While we develop a valid methodology for testing the tax discounting issue, our empirical results are inconclusive. As we point out this result was expected in light of the relatively small changes in the market value of the debt which took place during our sample period. Finally) we present a brief summary and conclusion in section 3.