Five-year Horizon Research Articles

To Win with 'Smart Beta' Ask If the Price is Right

In our paper — “How Can ‘Smart Beta’ Go Horribly Wrong?” — we show, using U.S. data, that the relative valuation of a strategy (in comparison with its own historical norms) is correlated with the strategy’s subsequent return at a five-year horizon. The high past performance of many of the increasingly popular factor tilt and so-called smart beta2 strategies came, in large measure, from rising valuations. These excess returns are an “alpha mirage” attributable to the strategies’ becoming more expensive relative to the market. Even the statistical significance of past performance was an illusion driven by rising relative valuation levels! Today, only the value category shows some degree of relative cheapness, precisely because its recent performance has been weak. Over the past half-century, almost all of the eight factors and eight smart beta strategies we study exhibit a negative relationship between starting valuation and subsequent five-year performance. Today, valuations of many of the most popular factors and smart beta strategies are well above their historical norms, forecasting lower future returns. Our findings are robust for both factors and smart beta strategies across horizons out to five years, using both a simple price-to-book ratio and an aggregate valuation measure, in U.S., developed ex U.S., and emerging markets.

Red flags for IPO downfalls in New Zealand

PurposeThe strong performance of New Zealand’s equity market and the Government’s efforts to encourage small investors to invest in initial public offering (IPO) firms raises two questions: should retail investors invest in IPO offers and what types of IPOs are worth buying in the long term? The paper aims to discuss these issues.Design/methodology/approachThe authors construct buy and hold equally weighted portfolios of IPOs and peers based on sales forecast, market capitalisation, and price-to-book ratio. The authors employ four benchmark-adjusted performance measures: cumulative average abnormal return (CAR), holding period return difference, wealth relative, and excess return (α).FindingsIPOs underperform their peers over the medium and long term, with a five-year CAR ranging between −6.4 and −19.7 per cent. IPOs listed post-GFC show inferior benchmark-adjusted performance with a statistically significant average monthly CAPM α of −1.07 per cent (vs −0.13 per cent for pre-2009 IPOs). Over a five-year horizon, mature IPOs, IPOs with high market cap, high sales forecast, high leverage, low price-to-book ratio, and positive earnings forecast outperform other IPOs. Small IPOs or those with a small degree of leverage exhibit the worst five-year CAR ranging between −30.2 and −49.1 per cent. Of all IPOs examined, large firms, well-established firms, and value firms achieved positive five-year CARs of between 6.6 and 17.5 per cent.Practical implicationsThe results are useful for retail investors and financial advisors in making sensible investment decisions.Originality/valueThis study is the first to utilise book-to-market and sales forecast to construct peer samples and to identify the red flags for IPO downfalls in New Zealand. It covers the longest sample period (1991-2015) in New Zealand’s context.

LEILAC: Low Cost CO2 Capture for the Cement and Lime Industries

The LEILAC project will apply a revolutionary carbon capture technology to the cement and lime industries. It aims to enable the capture of unavoidable process CO2 from limestone calcination for no energy cost and no extra capital cost (apart from compression). It is being developed by a consortium in a €21 M five-year Horizon 2020 project. A 240 t/d pilot will be built at HeidelbergCement's plant in Lixhe, Belgium, demonstrating that 95% of a plant's process CO2 emissions could be captured (around 60% of a plant's total direct CO2 emissions), and on-going R&D activities are reducing the uncertainties and risks involved.

An extrapolative model of house price dynamics

A model in which homebuyers make a modest approximation leads house prices to display three features present in the data but usually missing from rational models: momentum at one-year horizons, mean reversion at five-year horizons, and excess longer-term volatility relative to fundamentals. Approximating buyers assume that past prices reflect only contemporaneous demand, just like professional economists who use trends in housing prices to infer trends in housing demand. Consistent with survey evidence, this approximation leads buyers to expect increases in the market value of their homes after recent house price increases.

What Is the 'Cost per Regulator' on GDP and Private Sector Job Creation? An Update on Prior Research

Each $1 million change in the regulatory budget is associated with a change of about four regulator jobs. With our new update, we now find that a 10% cut in the regulatory budget results in a loss of 21,756 regulatory jobs. Given the average jobs impact of 3 million jobs over the five-year horizon, our updated analysis finds that one regulator costs the U.S. economy the equivalent of 138 private sector jobs per year. Each regulator costs the U.S. economy $11 million annually.

Government Debt and Risk Premia

I document that government debt is related to risk premia in various asset markets: (i) the debt-to-GDP ratio positively predicts excess stock returns with out-of-sample R 2 up to 30% at a five-year horizon, outperforming many popular predictors; (ii) the debt-to-GDP ratio is positively correlated with credit risk premia in both corporate bond excess returns and yield spreads; (iii) higher debt-to-GDP ratio is associated with lower real risk-free rates, (iv) higher debt-to-GDP ratio corresponds to lower average expected returns on government debt; (v) debt-to-GDP ratio positively comoves with fiscal policy uncertainty. I rationalize these empirical findings in a general equilibrium model featuring recursive preferences, endogenous growth, distortionary taxation, and time-varying fiscal uncertainty. In the model, the tax risk premium is sizable and its time variation is driven by fiscal uncertainty. Furthermore, the model generates an endogenous relationship between the debt-to-GDP ratio and fiscal uncertainty. Fiscal uncertainty increases debt valuation through lower government discount rate. This mechanism is reinforced as higher debt conversely raises uncertainty because of future fiscal consolidations.

Cost-Effectiveness of Deep Brain Stimulation for Advanced Parkinson’s Disease in the United States

Deep brain stimulation (DBS), which uses an implantable device to modulate brain activity, is clinically superior to medical therapy for treating advanced Parkinson's disease (PD). We studied the cost-effectiveness of DBS in conjunction with medical therapy compared to best medical therapy (BMT) alone, using the latest clinical and cost data for the U.S. healthcare system. We used a decision-analytic state-transition (Markov) model to project PD progression and associated costs for the two treatment strategies. We estimated the discounted incremental cost-effectiveness ratio (ICER) in U.S. dollars per quality-adjusted life-year (QALY) from the Medicare payer perspective, considering a ten-year horizon, and evaluated the robustness of our projections through extensive deterministic sensitivity analyses. Over ten years, DBS treatment led to discounted total costs of $130,510 compared to $91,026 for BMT and added 1.69 QALYs more than BMT, resulting in an ICER of $23,404 per QALY. This ICER was relatively insensitive to variations in input parameters, with neurostimulator replacement, costs for DBS implantation, and costs for treatment of disease-related falls having the greatest effects. Across all investigated scenarios, including a five-year horizon, ICERs remained under $50,000 per QALY. Longer follow-up periods and younger treatment age were associated with greater cost-effectiveness. DBS is a cost-effective treatment strategy for advanced PD in the U.S. healthcare system across a wide range of assumptions. DBS yields substantial improvements in health-related quality of life at a value profile that compares favorably to other well-accepted therapies.

Cost Effectiveness of Free Access to Smoking Cessation Treatment in France Considering the Economic Burden of Smoking-Related Diseases.

ContextIn France more than 70,000 deaths from diseases related to smoking are recorded each year, and since 2005 prevalence of tobacco has increased. Providing free access to smoking cessation treatment would reduce this burden. The aim of our study was to estimate the incremental cost-effectiveness ratios (ICER) of providing free access to cessation treatment taking into account the cost offsets associated with the reduction of the three main diseases related to smoking: lung cancer, chronic obstructive pulmonary disease (COPD) and cardiovascular disease (CVD). To measure the financial impact of such a measure we also conducted a probabilistic budget impact analysis.Methods and FindingsWe performed a cost-effectiveness analysis using a Markov state-transition model that compared free access to cessation treatment to the existing coverage of €50 provided by the French statutory health insurance, taking into account the cost offsets among current French smokers aged 15–75 years. Our results were expressed by the incremental cost-effectiveness ratio in 2009 Euros per life year gained (LYG) at the lifetime horizon. We estimated a base case scenario and carried out a Monte Carlo sensitivity analysis to account for uncertainty. Assuming a participation rate of 7.3%, the ICER value for free access to cessation treatment was €3,868 per LYG in the base case. The variation of parameters provided a range of ICER values from -€736 to €15,715 per LYG. In 99% of cases, the ICER for full coverage was lower than €11,187 per LYG. The probabilistic budget impact analysis showed that the potential cost saving for lung cancer, COPD and CVD ranges from €15 million to €215 million at the five-year horizon for an initial cessation treatment cost of €125 million to €421 million.ConclusionThe results suggest that providing medical support to smokers in their attempts to quit is very cost-effective and may even result in cost savings.

Product Market Deregulation and Growth: New Country-Industry-Level Evidence

The paper investigates the economic effects of major product market reforms in some of the historically most protected non-manufacturing industries. It relies on a unique mapping between new annual data on reform shocks and sector-level outcomes for five network industries (electricity and gas, land transport, air transport, postal services, and telecommunications) in twenty-six countries spanning over three decades. The use of a threedimensional panel and careful instrumentation of reform shocks using external instruments enables us to control for economy-wide macroeconomic shocks and address possible sources of omitted variable bias more broadly. Using a local projection method, we find that major reductions in barriers to entry yield large increases in output and labor productivity over a five-year horizon, concomitant with a relative price decline. By contrast, there is only a weak positive effect on sectoral employment, and investment is essentially unaffected, suggesting that output gains from reform primarily reflect higher total factor productivity. It takes some time for these gains to materialize: effects become statistically significant two to three years after the reform, as prices start dropping, and productivity and output increase significantly. However, there is no evidence of any negative short-term cost from reform, including under weak macroeconomic conditions. These findings provide a clear case for intensifying product market reform efforts in advanced economies at the current juncture of weak growth.

Discussion

Discussion

Product Market Deregulation and Growth: New Country-Industry-Level Evidence

The paper investigates the economic effects of major product market reforms in some of the historically most protected non-manufacturing industries. It relies on a unique mapping between new annual data on reform shocks and sector-level outcomes for five network industries (electricity and gas, land transport, air transport, postal services, and telecommunications) in twenty-six countries spanning over three decades. The use of a threedimensional panel and careful instrumentation of reform shocks using external instruments enables us to control for economy-wide macroeconomic shocks and address possible sources of omitted variable bias more broadly. Using a local projection method, we find that major reductions in barriers to entry yield large increases in output and labor productivity over a five-year horizon, concomitant with a relative price decline. By contrast, there is only a weak positive effect on sectoral employment, and investment is essentially unaffected, suggesting that output gains from reform primarily reflect higher total factor productivity. It takes some time for these gains to materialize: effects become statistically significant two to three years after the reform, as prices start dropping, and productivity and output increase significantly. However, there is no evidence of any negative short-term cost from reform, including under weak macroeconomic conditions. These findings provide a clear case for intensifying product market reform efforts in advanced economies at the current juncture of weak growth.

Creating M&A Opportunities through Corporate Spin‐Offs

This paper identifies a new motive for undertaking corporate spin-offs: a desire to pursue growth through M&A by using stocks of the spun-off firm as an acquisition currency. We find that spun-off firms make frequent acquisitions beginning in the year of the spin-off. Over a five-year horizon, a spun-off firm acquires, on average, five companies valued at about 45% of its initial market capitalization. In comparison, an average firm in our sample invests 36% of its initial capitalization in property, plant, and equipment, and 22% in research and development. The overwhelming majority of the acquired targets are either private companies (55%) or unlisted subsidiaries of public companies (33%). To finance growth, spun-off firms raise more capital through seasoned equity offerings than through new debt issuance, violating pecking order choice of financing between equity and debt. Perhaps most importantly, spun-off firms that are frequent acquirers enjoy highly significant abnormal returns over 12, 24, and 36-month period following the spin-off, whereas infrequent acquirers perform as expected.

The Cost and Cost-Effectiveness of Alternative Strategies to Expand Treatment to HIV-Positive South Africans: Scale Economies and Outreach Costs

The South African government is currently discussing various alternative approaches to the further expansion of antiretroviral treatment (ART) in public-sector facilities. Alternatives under consideration include the criteria under which a patient would be eligible for free care the level of coverage with testing and care how much of the care will be delivered in small facilities located closer to the patients and how to assure linkage to care and subsequent adherence by ART patients. We used the EMOD-HIV model to generate 12 epidemiological scenarios. The EMOD-HIV model is a model of HIV transmission which projects South African HIV incidence and prevalence and ARV treatment by age group for alternative combinations of treatment eligibility criteria and testing. We treat as sunk costs the projected future cost of one of these 12 scenarios the baseline scenario characterizing South Africa’s 2013 policy to treat people with CD4 counts less than 350. We compute the cost and benefits of the other 11 scenarios relative to this baseline. Starting with our own bottom-up cost analyses in South Africa we separate outpatient cost into non-scale-dependent costs (drugs and laboratory tests) and scale-dependent cost (staff space equipment and overheads) and model the cost of production according to the expected future number and size of clinics. On the demand side we include the cost of creating and sustaining the projected incremental demand for testing and treatment. Previous research with EMOD-HIV has shown that more vigorous recruitment of patients with CD4 counts less than 350 appears to be an advantageous policy over a five-year horizon. Over 20 years however the model assumption that a person on treatment is 92 percent less infectious improves the cost-effectiveness of higher eligibility thresholds over more vigorous recruitment at the lower threshold of 350 averting HIV infections for between $1700 and $2800 (under our central assumptions) while more vigorous expansion under the current guidelines would cost more than $7500 per incremental HIV infection averted. Granular spatial models of demand and cost facilitate the optimal targeting of new facility construction and outreach services. Based on analysis of the sensitivity of the results to 1728 alternative parameter combinations at each of four discount rates we conclude that better knowledge of the behavioral elasticities would be valuable reducing the uncertainty of cost estimates by a factor of 4 to 10.

PHP98 - Comparative Effectiveness Research (CER) and its effect on the Health Care decision-making Environment

Track the perceptions of key CER stakeholders about the current and future effects of CER on evidence generation and application for health care decisions Internet and mail survey of health care stakeholders, including government, health plans, researchers, human resources specialists, employers, and trade organizations, that are influential in or affected by CER; telephone follow-up to maximize response. Two-thirds of CER stakeholders say that the current CER evidence base is insufficient to support treatment decisions, but 90 percent remain committed to the importance of CER. This fifth survey in a series begun in 2010 found fewer respondents reporting no short-term effects of CER, but more than half of respondents believe that substantial improvement in decision-making based on CER will occur over the next 5 years. Almost three-fourths of respondents recognize PCORI’s significance in funding and monitoring new research, nearly double the level five years ago. Respondents are more positive about research priorities; nearly 40 percent believe priorities somewhat/adequately reflect treatment choices faced by patients and providers, compared to only 22 percent two years ago. Just 9 percent believe that processes for interpreting evidence are fully transparent and objective, fewer than in the previous three surveys. Only about 25% of respondents report that real-world evidence or evidence about variability in individual patient response is being used to support treatment decisions. In successive surveys, CER stakeholders continue to look to a five-year horizon for significant effects from CER. They generally view the evidence base as incomplete, recognize the key players in generating new evidence, and understand the time needed for research in their projections of CER’s impact. The relatively scarce use of real-world evidence and evidence about patient variability reflects their views about the completeness of the evidence base to support treatment decisions.

The Convenience Yield and the Informational Content of the Oil Futures Price

Recent studies have shown that futures prices do not generally outperform naive no-change forecasts of spot prices, calling into question the usefulness of futures prices for forecasting purposes. However, such usefulness is predicated on the question of whether certain modeling strategies are able to yield more of the information found in futures prices. Applying a forecast-based approach, we study the extent to which alternative ways of modeling futures prices can reveal the extent of the information present in futures prices. Using weekly and monthly data, and futures of maturities of one to four months, we notably examine the out-of-sample predictability of futures prices over various forecast horizons, and in real-time, whereby parameters are updated prior to each sequential forecast. Our results with weekly data are particularly interesting. We find that models allowing for a time-varying convenience yield often produce considerably more precise forecasts over the three forecast horizons considered. Thus, more of the informational content of futures prices is attainable when both the price level and the distance of the latter from spot price are jointly considered, rather than when only the price level is considered. We also document that forecast performances improve with longer date-to-maturity futures, suggesting that the role of the convenience yield is greater when physical oil inventories are held for longer durations. Finally, we show that forecast accuracy is highest at the one year horizon, though the time-varying convenience models have a much higher accuracy than unit-root-based models even over the three and five-year horizons.

The International Valuation Dispersion

We use a variance decomposition approach to examine why aggregate valuation ratios differ across countries. In a cross section of 22 developed countries from 1980 to 2009, we find that 50% of all cross-country differences in the aggregate price-to-book ratio (P/B) can be explained by cross-country differences in expected future five-year profitability. In the second half of our sample period, this percentage exceeds that of the first half, rising to almost 64%. Although international differences in accounting standards and conventions may have made earnings from different countries more difficult to compare relative to dividends, we find that it is still cross-country differences in expected future profitability, rather than dividend growth rates, that are more closely related to international differences in valuation ratios. Even among 25 emerging markets, we find that expected future profitability at the five-year horizon can account for 29% of all cross-country P/B variations. Our results show that international investors are able to identify substantial cross-country differences in future earnings prospects and incorporate them into stock market valuations.

Medium-Term Fiscal Multipliers During Protracted Recessions

The paper examines the consequences of fiscal consolidation in times of persistently low growth and high unemployment by estimating medium-term fiscal multipliers during protracted recessions (PR) in a sample of 17 OECD countries. Based on Jorda's (2005) local projection methodology, we find that cumulative fiscal multipliers related to output,employment and unemployment at five-year horizons are significantly above one during PR episodes. These results suggest that medium-term fiscal consolidation plans to reduce public debt burdens should proceed gradually if economic activity remains below trend for a prolonged period.

Medium-Term Fiscal Multipliers during Protracted Recessions

The paper examines the consequences of fiscal consolidation in times of persistently low growth and high unemployment by estimating medium-term fiscal multipliers during protracted recessions (PR) in a sample of 17 OECD countries. Based on Jorda’s (2005) local projection methodology, we find that cumulative fiscal multipliers related to output, employment and unemployment at five-year horizons are significantly above one during PR episodes. These results suggest that medium-term fiscal consolidation plans to reduce public debt burdens should proceed gradually if economic activity remains below trend for a prolonged period.

Identificación de factores de éxito para el sector cuero, calzado y marroquinería en Colombia, usando metodología delphi: análisis estructural y juego de actores

La globalización ha generado una dinámica compleja que dificulta la pla- neación en las organizaciones, por lo cual conviene contar con herramientas confiables que disminuyan la incertidumbre sobre el futuro. En ese contexto, este trabajo se basa en la metodología Delphi, análisis estructural y juego de actores para analizar los factores de éxito en la industria del cuero, calzado y marro- quinería en Colombia en un horizonte de cinco años, teniendo en consideración que todo análisis de prospectiva debe ser sistémico e incluir las interacciones entre las diferentes variables identificadas. Se consultaron expertos nacionales e internacionales, provenientes del sector productivo, gremial y académico, y se encontró que la calificación del personal, el uso de tecnologías de la in- formación y la comunicación y la implementación de verdaderas estructuras organizacionales son los tres principales factores claves para el éxito del sector. Con base en el resultado del juego de actores se evaluaron escenarios alternos agrupando factores o eliminando aquellos que no dependen exclusivamente del empresariado; y si bien los factores principales no varían, es pertinente considerar los escenarios mencionados, con el fin de establecer recomendaciones para el desarrollo del sector.

Using stochastic models to determine financial indicators and technical objectives for organic solar cells

Organic photovoltaics (PVs) are a rapidly emerging technology that has the potential to provide low-cost power for many different applications. The TEEOS model had previously been developed to determine various financial indicators for this technology. This paper modifies TEEOS in order to better analyze the effects of variability in the inputs. This modified TEEOS incorporates a mean-reverting jump diffusion model to simulate synthetic electricity price and a modified rainfall occurrence model to simulate a weather series. As well, the external quantum efficiency (EQE) is used as an input in order to gain insight on using low band gap polymers or enhancing the existing EQE. The power production NPV of three example cells, a Si-based solar cell, dye-sensitized solar cell (DSSC) and an organic solar cell (OSC), are first examined using a 25-year time period where the DSSC and OSC have to be replaced five times due to low lifetimes. The DSSC and OSC are also compared using five years of actual data using a five-year horizon. The sensitivity analysis looks specifically at inherent increases in the electricity price, the correlation of electricity prices and weather, modeling electricity without jumps, as well as enhancing and expanding the EQE. The best option for increasing the economic feasbility for the OSCs is expanding the EQE, that is, reducing the band gap of the polymers used. A break-even target of $45/m2 for the OSC is stated, which is on the low range of current cost estimates; this break-even-target would increase for locales closer to the equator.