Valuation Problem Research Articles

The two-factor price process in optimal sequential exploration

In a group of exploration prospects with common geological features, drilling a well reveals information about chances of success in others. In addition, oil prices vary during the exploration campaign and with them so do the economics of wells and the optimal decision to drill. With these dependencies and price dynamics, where do we drill first and what comes next given success or failure in previous wells? The solution to this valuation problem should compare the value of learning (drilling wells that provide valuable information) with the uncertain value of earning (drilling wells that have large payoffs, yet uncertain). We calculate a joint distribution for geological outcomes by applying information-theoretic methods and construct a two-dimensional binomial sequence to represent a two-factor stochastic price process. We then propose a Markov decision process that solves the optimal exploration problem. An Excel® VBA software implementation of this algorithm accompanies this paper.

Market and Institutional Limits in Supplying Animal Welfare: some Conceptual Thoughts for Future Agricultural Economic Research

Providing adequate levels of farm animal welfare is a challenge in today’s societies. Economic research indicates that neither market valuation for credence attributes in opaque markets, nor transparency improved market valuation with labelling schemes, nor non-market valuation in hypothetical markets to consider non-use values, nor non-monetary valuation in an ethical context are suitable to capture the value dimensions of farm animal welfare adequately. Monetary and non-monetary valuation problems stem from the complex concept of farm animal welfare and ethical challenges in utilitarian and anthropocentric approaches. Animal centred valuation of farm animal welfare is suggested as one future venue of economic research conditioned on overcoming speciesism.

The Introduction and Effect of SAFE in Equity-Based Crowdfunding

This study analyzes the valuation problems surrounding equity-based crowdfunding issuers and examines the introduction of the simple agreement for future equity (SAFE) as a means of solving them. We first analyze four stocks with crowdfunding experience listed on KONEX and K-OTC. In all instances, market capitalization consistently fell below the level at the time of the crowdfunding application. We therefore suggest the introduction of SAFE in crowdfunding as a potential solution. SAFE ameliorates the over-valuation problem by setting only minimum requirements such as valuation caps and by delaying the evaluation of corporate value until a follow-up investment is made. However, investor protection should be considered when introducing SAFE in Korea. First, the definition of “subsequent investments” should be clarified to prevent the issuer from intentionally delaying the transfer of shares. Second, the inclusion of financial performance in SAFE's share conversion conditions would prevent the firm from delaying share conversion while receiving favorable cash flows. Third, the scope of companies that can issue SAFE should be clearly defined to prevent firms from misusing them to avoid managerial interference. This study contributes as the first study within the Korean academia on the introduction and effectiveness of SAFE in crowdfunding.

ORIGINAL SIN, CURRENCY DEPRECIATION AND EXTERNAL DEBT BURDEN: EVIDENCE FROM INDIA

Indian Rupee has depreciated around 50 percent against the US Dollar for the last two decades. This depreciating trend generally doesn't call for any policy interventions as the conventional theories state that it is advantageous for the domestic economy through the competitiveness effect. However, depreciation is expected to increase the external debt burden when the country borrows abroad in foreign currency. At present more than 63 percent of India's external debt is foreign currency-denominated. Given this, the ramifications of a depreciating rupee through the balance sheet channel invite greater attention. This paper makes an attempt to understand the impact that a depreciating Indian Rupee will have on India's external debt dynamics. To this end, we estimated an Autoregressive Distributed Lag (ARDL) model using quarterly data for the period 2001-2018. The empirical evidence shows that the depreciation of rupee increases external indebtedness significantly. In the short run, one rupee depreciation increases external debt to GDP ratio by 0.75 percent while in the long run, the increase is 1.26 percent. The study also finds a causal link between external debt and economic growth in the Indian context, which makes the depreciation - debt valuation problem highly relevant.

Positive image as a key factor of increasing the enterprise's competitiveness

The article is devoted to defining the essence and role of corporate (value) image as a factor of the value-oriented competiti-veness at the enterprise. The relevance of topic is due to growing role of intangible assets, image of the company, in the growth of its market value. Need for further research is connected with the problem of valuation of image. It is also connected with fact that in the highly concentrated basic industries of economy in Ukraine the overwhelming number of enterprises are cost oriented. Purpose of the work is to improve methodology of assessing the image of a value-oriented enterprise based on the concept of Balanced Scorecard - BSC. The system-structural analysis and the method of logical generalization were used to clarify essence and place of image in the structure of intangible assets of the enterprise, factor and economic-mathematical analysis – to form the BSC management panel and to calculate the integral index of corporate image; critical analysis - to compare alternative approaches to form a Balanced Scorecard and role of company image in the implementation of its cost growth strategy. Assessment of the corporate (value) image of a metallurgical value-oriented enterprise is implemented by the normative method of integral evaluation of the investment attractiveness of enterprises and organizations. The Balanced Scorecard - BSC concept, which is emerged as a system of estimation of the cost and efficiency of the enterprise using measuring instruments of material and intangible factors of its value creation, was used as a tool for assessing the corporate (value) image of a metallurgical value-oriented enterprise. The validity of valuing image of a value-oriented enterprise based on the BSC concept is that a positive image of an industrial enterprise produces its future value in the stock market, which allows it to gain an edge over its competitors. The authors have improved the method of estimating the image of a value-oriented enterprise, which, unlike the known ones, involves the calculation of integral index of the corporate image of enterprise on the basis of the Balanced Scorecard. The comprehensive assessment of the indicator takes into account both positive characteristics and reasoning for the choice: significant orientation on expectations of the investment community; the possibility of taking into account contribution of intellectual capital of the enterprise in the creation of its future value; simplicity of calculation and availability of indicator logic perception at all levels of management; the ability to navigate key factors of value creation and value image of the enterprise to lower levels of management. The practical value of the proposed methodology for the assessment of corporate image is to determine the strategy of its adjustment and increase the strategic competitiveness of the enterprise.

Effect of institutional deleveraging on option valuation problems

This paper studies the valuation problem of European call options when the presence of distressed selling may lead to further endogenous volatility and correlation between the stock issuer's asset value and the price of the stock underlying the option, and hence influence the option price. A change of numeraire technique, based on Girsanov Theorem, is applied to derive the analytical pricing formula for the European call option when the price of underlying stock is subject to price pressure triggered by the stock issuer's own distressed selling. Numerical experiments are also provided to study the impacts of distressed selling on the European call option prices.

Executive Stock Option Exercise with Full and Partial Information on a Drift Change Point

We analyze the optimal exercise of an American call executive stock option (ESO) written on a stock whose drift parameter falls to a lower value at a change point, an exponentially distributed random time independent of the Brownian motion driving the stock. Two agents, who do not trade the stock, have differing information on the change point and seek to optimally exercise the option by maximizing its discounted payoff under the physical measure. The first agent has full information and observes the change point. The second agent has partial information and filters the change point from price observations. This scenario is designed to mimic the positions of two employees of varying seniority, a fully informed executive and a partially informed less senior employee, each of whom receives an ESO. The partial information scenario yields a model under the observation filtration $\widehat{\mathbb{F}}$ in which the stock drift becomes a diffusion driven by the innovations process, an $\widehat{\mathbb{F}}$-Brownian motion also driving the stock under $\widehat{\mathbb{F}}$, and the partial information optimal stopping value function has two spatial dimensions. We rigorously characterize the free boundary PDEs for both agents, establish shape and regularity properties of the associated optimal exercise boundaries, and prove the smooth pasting property in both information scenarios, exploiting some stochastic flow ideas to do so in the partial information case. We develop finite difference algorithms to numerically solve both agents' exercise and valuation problems and illustrate that the additional information of the fully informed agent can result in exercise patterns which exploit the information on the change point, lending credence to empirical studies which suggest that privileged information of bad news is a factor leading to early exercise of ESOs prior to poor stock price performance.

The problem of iintellectual capital valuation: reasons and approaches to the solution

The problem of iintellectual capital valuation: reasons and approaches to the solution

Assessment Methods of Intellectual Product in Research Universities

This paper summarizes the arguments and counterarguments within the scientific debate over how to find the best methodology for valuing the intellectual products of research universities. The main purpose of the research is to propose a methodology for evaluating the product of intellectual labour in research universities. The systematization of literary sources and approaches to solving the problem of valuation of intellectual property has shown that, despite the considerable amount of scientific work on the valuation of intellectual property objects, there is no methodology for their evaluation in research universities. This problem is actualized at the stage of transformation of an intellectual product into a full-fledged type of economic activity. This study sheds light on the basic basics of the proposed methodology for determining the technical and economic utility of an intellectual product. The author’s methodology improves the classification of the intellectual property valuation and the basic concepts used in carrying out the valuation, the types of values, methodological approaches to the valuation and calculation of the intellectual property, the baseline information requirements, the evaluation procedure and the calculations. However, particular attention is paid to the main provisions for evaluating the university’s intellectual performance. The developed methodological recommendations will be useful to experts in cost estimation in intellectual property, in rendering independent valuation services, in carrying out internal valuation and in experts in carrying out valuation assessment. The methodological basis of the study is a scientific and practical understanding of the achievements of foreign scientists in the field of intellectual capital theory and analysis of Ukrainian legislation in the field of intellectual property. Methodological tools of the study were methods of economic-mathematical and logical-structural modelling. Research universities are selected as the research object because they are the core of the creation of intelligent and innovative products and the main driver of scientific and technological progress in the country and the world. The research empirically confirms and theoretically proves that the developed methodology for the intellectual activity evaluation of research universities is the basis for organizing and implementing the process of determining the value of objects of intellectual property of the institution. Keywords intellectual property object, intellectual product, intellectual activity, research universities, methods of valuation of intellectual property objects.

Least upper bound of percent good factors of used machinery items

We consider one of the problems of valuation of used machinery items. During operation, the technical and economic characteristics of the machinery item tend to deteriorate and the probability of its catastrophic (resource) failure changes. Accordingly, the market value of a used machinery item is reduced compared to a similar new one. The ratio of the market value of a used machinery item and a similar new one, expressed in a percentage (or as fractions of a unit) is called the percent good factor (goodness factor). In general, it depends on the technical condition of the machinery item. However, it is difficult to quantify and reliably estimate it in many cases (for example, in mass assessment), and appraisers are forced to rely only on the machine’s age. There are numerous articles containing recommended by the authors dependencies of goodness factors (or their additions to one, namely physical depreciation factors) on age. We present a model of the dependence of the machine’s market value on age, which allows us to establish the exact upper limit for its goodness factors. We show that a number of recommended dependencies do not satisfy the obtained restriction and therefore can lead to erroneous results.

A Dual Method For Evaluation of Dynamic Risk in Diffusion Processes

We propose a numerical method for risk evaluation defined by a backward stochastic differential equation. Using dual representation of the risk measure, we convert the risk evaluation to a simple stochastic control problem where the control is a certain Radon-Nikodym derivative process. By exploring the maximum principle, we show that a piecewise-constant dual control provides a good approximation on a short interval. A dynamic programming algorithm extends the approximation to a finite time horizon. Finally, we illustrate the application of the procedure to financial risk management in conjunction with nested simulation and on a multidimensional portfolio valuation problem.

Game theoretic valuation of deposit insurance under jump risk: from too small to survive to too big to fail

This study examines the valuation problem in deposit insurance as a game option between the deposit insurer and the insured bank with asymmetric bankruptcy costs. The asset-to-deposit ratio of the insured bank is modeled as an exponential Levy process with a spectrally negative jump. The study examines a wide range of scenarios in which the optimal closure policies of both parties are fully characterized. Explicit solutions are derived under the exponential jump diffusion case. This model captures several important issues in banking supervision, including the too big to fail and too small to survive phenomena, bank reorganization, and regulatory forbearance.

FORECASTING, VALUATION AND PORTFOLIO RETURNS OF STOCK MARKET EVOLUTION: PROBLEMS, PARADOXES AND EFFICIENT INFORMATION. WORLDWIDE IMPLICATIONS AND ROMANIAN EVIDENCE

The purpose of this paper is to make a quantitative and qualitative critical analyse regarding the three important aspects of stock market evolution. First, the forecasting problems are presented and analyse in order to establish the main problems and the potential solutions. Second, the valuation problems are tackled in order to observe different trends and directions of solving these issues. Third, the portfolio return forecasts are mandatory in order to establish the results of the titles/market evolutions. The methods used in this research reveal the importance of adopting some important econometric tools in order to test the robustness of different main theories of the stock market and some important practices used among investors. The scope of the research was to give a quid pro quo in order to confer potential solutions regarding problems, paradoxes and efficient information of the stock market. The empirical results reveal that besides the critical side of the theories this paper sets a basis for a new eclectic approach regarding the probabilities that a title achieves certain values within a reasonable time frame. The main conclusion of this article suggests’ that the current theories register some gaps regarding the adherence into stock markets’ realities.

Distributionally robust optimization with multiple time scales: valuation of a thermal power plant

The valuation of a real option is preferably done with the inclusion of uncertainties in the model, since the value depends on future costs and revenues, which are not perfectly known today. The usual value of the option is defined as the maximal expected (discounted) profit one may achieve under optimal management of the operation. However, also this approach has its limitations, since quite often the models for costs and revenues are subject to model error. Under a prudent valuation, the possible model error should be incorporated into the calculation. In this paper, we consider the valuation of a power plant under ambiguity of probability models for costs and revenues. The valuation is done by stochastic dynamic programming and on top of it, we use a dynamic ambiguity model for obtaining the prudent minimax valuation. For the valuation of the power plant under model ambiguity we introduce a distance based on the Wasserstein distance. Another highlight of this paper is the multiscale approach, since decision stages are defined on a weekly basis, while the random costs and revenues appear on a much finer scale. The idea of bridging stochastic processes is used to link the weekly decision scale with the finer simulation scale. The applicability of the introduced concepts is broad and not limited to the motivating valuation problem.

Valuation of defer and relocation options in photovoltaic generation investments by a stochastic simulation-based method

Risk management is crucial when committing investments in electricity markets. Investment projects for the generation of electricity are capital-intensive, in large part irreversible and future performance is subject to high uncertainty. Fortunately, most power generation projects have strategic flexibility for handling uncertainty and for mitigating risks under unfavorable scenarios. Modern corporate finance recognizes Real Option analysis (ROA) as the correct way to value investment projects with these characteristics. Due to both, environmental concerns and escalation of fuel prices, electricity generation from renewable sources has grown dramatically worldwide over the last decade. Renewable investment projects share many of the features mentioned. As such, option valuation methods should be applied to estimate the monetary value of flexibility in renewable energy investments. This work presents an appropriate methodology for assessing the economic value of a photovoltaic power plant under uncertainties. ROA is applied to determine the value of delaying the investment decision while waiting for better market information that would reduce acquisition costs due to progress in solar technology. The flexibility of relocating the solar facility in the future upon the appearance of a more attractive site in terms of cost, network accessibility or regulatory policies is also valued. The problem of option valuation is solved through stochastic simulation combined with recursive approximate dynamic programming techniques. The methodology developed might be used by investors for more efficient decision-making and by regulatory agencies for designing adequate support policies that encourage investment in renewable energy generation.

ROLE OF MAIN ACTIVITIES IN FORMATION OF THE CAPITAL OF AN ENTERPRISE, THEIR EVALUATION AND CONTROL

The article deals with the problem of valuation and control of non-current assets, in particular of fixed assets, determination of their role in the formation of the enterprise’s own capital, their correct and reliable evaluation at the enterprise. The need to study the effectiveness of using non-current assets at the enterprise to make sound management decisions, in particular regarding the composition of fixed assets, their updating and use is defined. The necessity of studying the influence of fixed assets on the amount of gross product is substantiated. It should be noted that non-current assets, in particular fixed assets, have a significant place in the capital formation. Therefore, in the process of managing non-current assets at the enterprise such managerial tasks are decided as substantiation of renewal fixed assets possible forms, determination of possible ways and the need for their growth, formation of necessary financial resources for acquisition of fixed assets and increase the are efficiency. Correct and substantiated non-current assets accounting system at the enterprise has a significant influence on the quality of accounting and control in general. Professionals know that without the ability to proper and quick assess business value it is impossible to get a wide middle class of owners, sustainable and dynamic market development, prevention of financial pyramids, economic lawlessness, investor mistrust and, as a result, creation of a legal and proper micro- and macroeconomic environment. The economies of Germany, France, the United States, Japan and other developed countries are based on this ability. Multi-factor economic and mathematical modeling taking into account microeconomic factors is carried out. It is proved that certain rates of development and increase of production efficiency at Ukrainian enterprises are possible provided the intensification of reproduction and better use of existing fixed assets of the enterprise, finding internal reserves for the growth of production efficiency, such as optimization of the structure of assets and the number of employees.

DESCRIPTION OF THE PROPERTY VALUATION PROCESS IN POLISH CONDITIONS

The study attempts to describe the property valuation process in the context of regulations in force In Poland. For this purpose, to this end, the current legal acts, professional standards of real estate appraisers as well as institutional and economic conditions were analyzed. The study starts with the characterization of the property at the subject of valuation, the types of determined values, then the silhouette of the real estate appraiser as a professional authorized to valuation of the property was presented. The most important part of the study, from the point of view of the study goal, is the description of the process of valuation of real estate in Polish conditions. This paper presents a general valuation model, which the difficult and complex problem of valuation presents in a comprehensive, consistent and logical way. Various research approaches have been used for the purpose of the study. Qualitative approach based on observation, interview, analysis of dispersed sources allowed to formulate research assumptions. Next, methods of scientific inference were used, mainly analysis and synthesis. In the paper, due to the aim, mainly the Polish literature on the subject was used as well as legal acts and other sources of information.

A protocol analysis of use of forward and backward reasoning during valuation problem solving

PurposeBehavioural studies of valuers have suggested that valuers rely on a number of cognitive strategies involving reasoning and intuition when undertaking a valuation task. However, there are few studies of the actual reasoning mechanisms in valuation. In other fields, much attention has been paid to forward and backward reasoning, as this shows the choices and decisions that are made in undertaking a complex task. This paper studied this during a valuation task. The purpose of this paper is twofold: first, to develop a methodological approach for empirical research on valuers’ reasoning, and, second, to report expert-novice differences on valuers’ use of forward and backward reasoning during a valuation problem solving.Design/methodology/approachThe study utilised a verbal protocol analysis (VPA) to elicit think-aloud data from a purposive sample of a group of valuers of different levels of expertise undertaking a commercial-valuation task. Through a content analysis interpretive strategy, the transcripts were analysed into different cognitive segments identifying the forward and backward reasoning strategies.FindingsThe findings showed that valuers accomplished the valuation task by dividing the overall problem into sub-problems. These sub-problems are thereafter solved by integrating available data with existing knowledge by relying more on forward reasoning than backward reasoning. However, there were effects associated with the level of expertise in the way the processes of forward and backward reasoning are used, with the expert and intermediate valuers being more thorough and comprehensive in their reasoning process than the novices.Research limitations/implicationsThis study explores the possibility that forward and backward reasoning play an important role in commercial valuation problem solving using a limited sample of valuers. Given this, data cannot be generalised to all valuation practice settings but may motivate future research that examines the effectiveness of forward and backward reasoning in diverse valuation practice settings and develops a holistic model of valuation reasoning.Practical implicationsThe findings of this study are applicable to valuation practice. Future training efforts need to evaluate the usefulness of teaching problem solving and explicitly recognise forward and backward reasoning, along with other problem-solving strategies uncovered in this study, as standard training strategies for influencing the quality of valuation decisions.Originality/valueBy adopting VPA, this study employs an insightful and rich dataset which allows an interpretation of thoughts of valuers into cognitive reasoning strategies that provide a deeper level of understanding of how valuers solve valuation problem; this has not been possible in previous related valuation studies.

Cones, Arbitrage, and Asset Prices

Suppose X is an infinite-dimensional ordered topological vector space. Suppose a linear and positive price functional ϕ is given on a subspace Z of marketed claims. The so-called valuation problem is about the following question: does there exist a continuous, strictly positive, linear extension of ϕ from Z to the entire contingent claims space X? I exploit recent developments in the theory of ordered vector spaces, specifically strongly reflexive cones and cones with semi-interior points, to study the valuation problem in normed spaces and its implications for asset pricing.

Piece Problems: Component Valuation in Marketing and in Patent and Tort Law

The problems referred to in the title of this chapter concern evaluating a given variable when it is one of several that have combined to bring about a result. In some cases, there is an easy market solution. Imagine that you contract to buy a house and then the beautiful kitchen stove, one of many things that attracted you to the property, is destroyed before you close the transaction or occupy the property. How much should the price now be reduced? Here there is an upper limit based on the cost of a comparable replacement appliance. A more precise valuation would also be easy if identical houses, lacking this one feature, had recently been sold. The stove is just a piece of the larger transaction, and with these convenient facts, there is not much of a “component valuation problem.” Additionally, the stove is unlikely to have been of greater value because of its interaction with other items in the house; colors and sizes are fairly standardized. “Conjoint analysis” – a term that usually refers to survey evidence that tries to elicit the value of a component – is therefore unnecessary, or at least uncomplicated, because value does not depend on an interaction among variables in a way that is not directly observed. It is also interesting because it does not present a difficult Game Theory problem, or result that might be described in common parlance as something that depends on the relative bargaining skill of the parties.