Expected Growth Rate Research Articles

Asset Pricing with Uncertainty About the Long Run

When investors have preferences for early resolution of uncertainty, higher uncertainty about future growth rates raises agents’ marginal utility, which generates a premium for bearing uncertainty risk. If expected growth rates have persistent long-run dynamics, small local uncertainty about the growth rate can translate into large uncertainty about future cash flows, which amplify the uncertainty premium. We study the effects of learning on the dynamics of asset prices in an endowment economy, where agents learn about consumption growth through a nonlinear filter. The uncertainty premium is large, varies substantially over time, and tends to rise following negative consumption shocks. Moreover, a decrease in consumption volatility can sometimes sharply increase the Sharpe Ratio and risk premium.

The Effect of Benefits and Risks On E-procurement Implementation: An Exploratory Study of Swedish and Indian Firms

E-procurement is constantly receiving lot of attention from industries, and government agencies. Analysts believe that utilization of e-procurement can lead to enormous cost saving and efficiency in procurement process. Though, e-procurement has benefited the global business tremendously, its expected growth rate has been moving downwards. The present study explores how the benefits and risks associated to e-procurement affect the e-procurement implementation. The differences and similarities among firms in different setting are also investigated. By using Swedish and Indian firms, the results show that cost benefit is the main driver for companies to implement e-procurement. The problems of implementation and integration of existing infrastructure are holding back companies from implementing e-procurement. But benefits are overpowering risks and companies are moving toward more aggressive strategic approach of implementing e-procurement. Finally, e-procurement is typically used for buying indirect material and the buyer side model is most dominated in industry.

A Cross-Sectional Analysis of Cap Rates by MSA

There are a number of global factors driving capital markets and required rates of return that help to explain observed capitalization rates or “cap rates” over time, but little is known about the factors driving the geographical cross-sectional variation of these cap rates. This paper uses data from Real Capital Analytics for multifamily properties to explore several models that combine the expected influences from housing demand growth, supply constraints, liquidity risk and the interaction of these. The findings reveal a very strong and robust relation between supply constraints and cap rates, as well as evidence of capital flowing from larger markets to smaller markets in recent years. There is also weak but generally supportive evidence of influences from expected growth rates, liquidity, and other risk factors.

Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models.

Optimal Sharing of Labor Productivity Risks and Mix of Pay-as-You-Go and Savings

This paper addresses two related issues: the optimal intergenerational sharing of labor productivity risks, through a Pay-As-You-Go (PAYG) social security with contingent rates of benefits and contributions, and the optimal combination of PAYG and funded savings in a small open economy. It shows that partial contingency of the social security on the labor productivity is ex ante optimal, when the interest rate is above the expected growth rate of the economy, and when the government has a lifetime perspective of the risk exposure. In addition, the government may induce a higher saving rate, due to the expected lower PAYG return and the household's desire of smoothing consumption over time.

Expected Consumption Growth from Cross-Country Surveys: Implications for Assessing International Capital Markets

Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models.

SIMULATION‐BASED PORTFOLIO OPTIMIZATION FOR LARGE PORTFOLIOS WITH TRANSACTION COSTS

We consider a portfolio optimization problem where the investor's objective is to maximize the long‐term expected growth rate, in the presence of proportional transaction costs. This problem belongs to the class of stochastic control problems with singular controls, which are usually solved by computing solutions to related partial differential equations called the free‐boundary Hamilton–Jacobi–Bellman (HJB) equations. The dimensionality of the HJB equals the number of stocks in the portfolio. The runtime of existing solution methods grow super‐exponentially with dimension, making them unsuitable to compute optimal solutions to portfolio optimization problems with even four stocks. In this work we first present a boundary update procedure that converts the free boundary problem into a sequence of fixed boundary problems. Then by combining simulation with the boundary update procedure, we provide a computational scheme whose runtime, as shown by the numerical tests, scales polynomially in dimension. The results are compared and corroborated against existing methods that scale super‐exponentially in dimension. The method presented herein enables the first ever computational solution to free‐boundary problems in dimensions greater than three.

Pricing Two Trees When Trees and Investors are Heterogeneous

We consider an exchange economy with two heterogeneous stocks and two groups of investors. Dividends follow diffusion processes, with a constant expected growth rate for one stock and a stochastic drift for the other. 'Rational investors' can either observe this stochastic drift without error or are at least able to use a noisy signal about it, while 'irrational investors' base their inference only on dividend observations. In an economy with homogeneous investors, uncertainty about the drift increases the volatilities of both stocks and the expected return of the smaller stock. Differences between the two types of stocks are mainly caused by learning, which increases both the volatility and the expected return of the stock with the stochastic drift. When both groups of investor are present, differences in portfolio holdings and thus trading mainly depend on differences in beliefs. In the long run, the irrational investors will be driven out of the market, and for realistic parameter scenarios, they can loose on average half of their wealth within twenty years.

Portfolio Insurance with Liquidity Risk

This paper studies a portfolio insurance problem with liquidity risk. We consider an investor who wants to maximize the expected growth rate of wealth in a low liquid market. The investor can trade assets only at random times and his wealth must not fall below a predetermined floor. We find the optimal expected growth rate and an optimal strategy. The optimal strategy is closely related with a traditional constant proportion portfolio insurance strategy. Also we show that the same strategy maximizes the growth rate almost surely. Further we study the floor effect on the growth rate.

Rare Disasters, Asset Prices, and Welfare Costs

A representative-consumer model with Epstein-Zin-Weil preferences and i.i.d. shocks, including rare disasters, accords with observed equity premia and risk-free rates if the coefficient of relative risk aversion equals 3–4. If the intertemporal elasticity of substitution exceeds one, an increase in uncertainty lowers the price-dividend ratio for equity, and a rise in the expected growth rate raises this ratio. Calibrations indicate that society would willingly reduce GDP by around 20 percent each year to eliminate rare disasters. The welfare cost from usual economic fluctuations is much smaller, though still important, corresponding to lowering GDP by about 1.5 percent each year. (JEL E13, E21, E22, E32)

Molecular Layer Deposition of Nylon 66 Films Examined Using in Situ FTIR Spectroscopy

Molecular layer deposition (MLD) techniques can utilize sequential, self-limiting surface reactions with bifunctional monomers to grow polymer films. In this study, transmission in situ Fourier transform infrared (FTIR) investigations were utilized to monitor the growth of nylon 66 MLD films using adipoyl chloride (AC) and 1,6-hexanediamine (HD) as the bifunctional monomers. In situ FTIR measurements on high surface area SiO2 powders monitored the linear growth of the integrated absorbance of the N−H, C−H, C−N, and CO stretching vibrations and the CO−N−H bending vibrations versus the number AC and HD sequential exposures. The growth of the integrated absorbance for the nylon 66 features was also self-limiting as a function of the individual AC and HD exposures. In addition to the vibrational modes expected for nylon 66, vibrational features were also observed that were consistent with some ammonium chloride salt incorporated in the film during nylon 66 MLD. The temperature dependence of the nylon 66 growth rate for constant exposures revealed that the highest growth rates were observed at the lowest sample temperature of 62 °C. This temperature dependence was consistent with a precursor-mediated adsorption model. Nylon 66 MLD was studied with and without surface functionalization of the SiO2 substrate using (3-aminopropyl)triethoxysilane (APS). The APS functionalization facilitated the reaction of AC with the amine-terminated surface. The growth rate of the nylon 66 MLD films was estimated using in situ transmission FTIR measurements on flat KBr substrates with an amine-terminated Al2O3 ALD overlayer. The integrated absorbance of the C−H vibrational stretches was utilized to estimate the nylon 66 MLD growth rate per AC/HD reaction cycle. The observed growth rates were both above and below the expected growth rate for one nylon 66 bilayer. This range of growth rates illustrates the difficulties involved in using bifunctional monomers for MLD.

Portfolio selection with transaction costs under expected shortfall constraints

An investor subject to proportional transaction costs allocates funds to multiple stocks and a bank account, to maximise the expected growth rate of the portfolio value under Expected Shortfall (ES) constraints. In a numerical example with ten time steps and one stock important innovations are caused by the introduction of the Expected Shortfall constraint: First, expected returns are reduced by less than one-tenth when the ES constraint is introduced. In comparison, economic capital as measured by ES, is reduced to amounts between one-half and three-quarters, when the ES constraint is introduced. Second, the dependence of expected return and ES on the initial portfolio, in particular when transaction costs are high, is largely removed by the introduction of the ES constraint.

Lead-lag Relationship between the Implied Expected Growth Rate of Index Futures and the Return of the Index Spot

The impact of market imperfections is tremendous. They influence not only the pricing of financial assets, but also the dynamic relationship among financial instruments. Hsu and Wang (2004) develop a pricing model of stock index futures in imperfect markets, providing a method for estimating the implied expected growth rate. By using the vector auto regression (VAR) model, Granger causality test, and generalized impulse response function (GIRF), this study investigates the lead-lag relationship between the expected growth rate implied by the prices of index futures and the rate of return of the underlying index spot. The empirical result shows that the lead-lag relationship is weaker in the mature US markets than in the emerging Taiwanese markets. Moreover, it also shows a less significant lead-lag relationship in the US markets as Taiwanese markets do. The empirical evidence supports the hypothesis that the lead-lag relationship between the implied expected growth rate and the index spot return should become weaker as the degree of market imperfection decreases.

Growth rate model of InP epitaxial lateral overgrowth

Theoretical expressions of the epitaxial lateral overgrowth rate in the metalorganic chemical vapor deposition (MOCVD) have been formulated in this paper, with respect to two separate processes: vapor phase diffusion and mask surface diffusion. In the case of InP deposition on GaAs substrate, a parametric study was accomplished in order to determine the impact of the mask/window width to the growth rate. The model, which uses a new parameter “effective mask length” Lmask, reveals that the key factors determining the growth rate are mask/window width and mask width/effective mask length. This model can be used as a tool for predict the growth conditions leading to expected growth rate.

No Arbitrage and the Growth Optimal Portfolio

Recently, several papers have expressed an interest in applying the Growth Optimal Portfolio (GOP) for pricing derivatives. We show that the existence of a GOP is equivalent to the existence of a strictly positive martingale density. Our approach circumvents two assumptions usually set forth in the literature: 1) infinite expected growth rates are permitted and 2) the market does not need to admit an equivalent martingale measure. In particular, our approach shows that models featuring credit constrained arbitrage may still allow a GOP to exist because this type of arbitrage can be removed by a change of numéraire. However, if the GOP exists the market admits an equivalent martingale measure under some numéraire and hence derivatives can be priced. The structure of martingale densities is used to provide a new characterization of the GOP which emphasizes the relation to other methods of pricing in incomplete markets. The case where GOP denominated asset prices are strict supermartingales is analyzed in the case of pure jump driven uncertainty.

The Impact of Projected Demographic Developments on Funded Pension Provision in Austria

The following study analyzes the impact of demographic developments in Austria on funded pension provision in Austria. It does so by integrating demographic developments in to a standard growth model, linking the results to the accumulation and annuitisation of funded pensions. Furthermore, the simulations introduce the possibility of the international diversification of investments and consumption as well as the integration of real capital markets. The simple structure of the model allows us to conduct a number of sensitivity analyses. Furthermore, it helps to identify the the underlying interactions at work in obtaining the overall results. The key results of this study are the following: (1) Households' net supply of savings and the demand for capital by the corporate sector (net investment) both need to be integrated into the empirical and theoretical analysis of the impact of demographic developments on financial markets. Considering the relative supply and demand for financial assets within the household sector (as is done in the asset meltdown literature) is not the adequate conceptual framework. (2) Funded pension provision is exposed to two demographic risks: decreasing birth rates and increasing longevity. On the one hand, lower expected growth rates of the input labour are expected to exert downward pressure on long-term real interest rates and future pension income. Increasing longevity further reduces future pension income. (3) On the other hand, decreasing future net savings relative to net investment partly exert upward pressure on the long-term real interest rates. The net impact is evaluated based on a simulation exercise. (4) In public discourse, the superiority of funded pension provision is argued on the basis of demographic change, which is supposed to make public pension provision unsustainable. The model and the simulations in this paper highlight the impact of demographic change on funded pensions and its dynamics as well as quantify the order of magnitude of this impact. The negative impact of demographic change on funded pension provision is non-negligible.

Macroeconomic variables and the E/P ratio: Is inflation really positively associated with the E/P ratio?

We examine the economywide E/P ratio both over a long time period (1952–2003) and by dividing the entire period into subperiods. We have two main objectives. First, we reexamine the puzzling result documented by Modigliani and Cohn (1979), who find that, contrary to theory, the economy wide E/P ratio and inflation are positively correlated. Our longer period of analysis allows us to divide the entire period into subperiods with differing macroeconomic environments. We find that the Modigliani and Cohn anomaly is period specific. The association between the E/P ratio and inflation reverses from one period to another. Hence, the relation between inflation and the economywide E/P ratio is not stable over a long time period. Second, we analyze the associations between the economywide E/P ratio and its two main drivers as given by the Gordon (1962) model. We find that the economywide E/P ratio (a) is not associated with the real interest rate and (b) is weakly negatively associated with the expected growth rate. Findings for inflation do not change when we include or exclude other E/P drivers in regression specifications.

Strong-Form Efficiency with Monopolistic Insiders

We study market efficiency in an infinite-horizon model with a monopolistic insider. The insider can trade with competitive market makers and noise traders, and observes privately the expected growth rate of asset dividends. In the absence of the insider, this information would be reflected in prices only after a long series of dividend observations. Thus, the insider’s information is “long-lived.” Surprisingly, however, the monopolistic insider chooses to reveal her information very quickly, within a time converging to zero as the market approaches continuous trading. Although the market converges to strong-form efficiency, the insider’s profits do not converge to zero.

Competition and entrepreneurs' human capital in small business longevity and growth

An analysis of data on a sample of small-scale manufacturers shows that a business is less likely to survive and grows slower the smaller the average price–cost margin in the industry in which it operates. The probability of survival is also smaller in import competing industries. So is the mean growth rate among survivors. We interpret this as evidence that small businesses are less likely to survive and grow slower in industries where the pressure of competition is stronger. Given competitive pressure and establishment characteristics, the probability of business survival and the expected growth rate conditional on survival both increase with entrepreneurial human capital. This is in the sense that the probability of business survival increases with the number of years of schooling and the number of years of business experience of the entrepreneur as does the expected growth rate conditional on survival. These results are consistent with another finding that unobservable influences on business hazard are correlated with those on growth. As a result, the effect of competition and entrepreneurial human capital on the growth of survivors would be biased for the effect of the same variables on the expected growth rate of a startup.

Expected earnings growth and portfolio performance

We form portfolios based on forecasted growth rates in earnings and apply stochastic dominance tests. Low expected-growth rate portfolios dominate high expected-growth rate portfolios. This suggests that the superior return performance of value stocks is not due to omitted risk factors but is a consequence of investors making systematic errors in forming earnings expectations.