Simple Present Value Model Research Articles

The Impact Of Stock Price On Investment Decision: Theory & Evidence

Purpose – The purpose of this paper is to present a behavioral explanation of excess stock price volatility relative to present value theory. Design/methodology/approach – The conceptual basis is the impact of effect on investor decisions. The empirical tests involve survey data collected from a sample of semi-professional Investors and investment advisors. Findings – It is suggested that affect causes investors to perceive an inverse ex ante relationship Between risk perceptions and expected returns. Thus, new good or bad information has an amplified effect on stock valuations. In addition, investors tend to extrapolate recent short-term market movements into the future. Practical implications – The primary implications are that ex ante perceptions of risk and return Vary inversely and that affect has a strong influence on valuation. This means that simple statistical Measures of risk are unlikely to fully capture risk perceptions and that market volatility can be Expected to be greater than a simple present value model would imply. Originality/value – This paper is unique as to the conclusion that risk and return perceptions vary Inversely ex ante and that affect can amplify stock price volatility

What drives China's current account?

The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982–2007, including the persistent surpluses since 2001. It also correctly predicts the decline of China's current account since 2008. Expected increases in the prices of non-tradeables (e.g. housing and medical care) and expected declines in net output (GDP less investment and government spending) are the main channels of external adjustment. Much of China's current account surplus seems driven by shocks that have global effects by persistently depressing the world real interest rate. This is consistent with recent theoretical models that suggest that factors related to China's domestic financial development are key in understanding global imbalances.

Present Value Model, Bubbles and Returns Predictability: Sector‐Level Evidence

Abstract: Evidence regarding the validity of the present value model for stock prices has typically been assessed at index level. Moreover, such research typically rejects the model. In contrast research at the firm level is more supportive of the model. This paper, using the present value model as the base for analysis, considers sector level data. Three main objectives motivate the paper. First, to fill the gap in the research noted above. Second, to see if the recent technology bubble affected all other sectors. Third, to examine returns predictability using the present value model adjusted for the presence of bubbles. The results suggest, first, only limited support for the simple present value model, supporting the notion that as data are aggregated then the information content of dividends becomes obscured. Second, that the late 1990s bubble affected all sectors with the exception of the more traditional industrial sectors, which have seen significant price rises following the end of the early 2000s bear market. Third, a regime switching model that incorporates both a fundamental and bubble component demonstrates that when the bubble component is small the dividend yield acts as a reasonable predictor of sector returns, however, when the bubble is large prices become disconnected from dividends. The results here inform our knowledge of the present value model and should be of interest both to researchers attempting to model market behaviour and investors attempting to forecast it.

What Drives China's Current Account?

The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982-2007, including the persistent surpluses since 2001. Expected increases in the prices of non-tradeables - housing and medical care - are the single most important channel of external adjustment, followed by consumption smoothing. Much of this pattern is driven by a permanent global shock that persistently depresses the world real interest rate and increases the current account, suggesting that shocks to precautionary saving are key in understanding China's surplus. These findings are robust to controlling for revaluation expectations in the fixed exchange rate regime and for measurement error in the current account balance.

What Explains the Variance of Prices and Returns?: Time-series Vs. Cross-section

This paper studies the relative importance of discount rates and cash flows with a focus on the differences between time-series and cross-sectional variance tests. I show that the following holds for the market, different types of portfolios, and individual stocks: (a) changes in expected returns drive the majority of the time-series volatility in price ratios and unexpected returns, and (b) differences in expected cash flows generate most of the cross-sectional variance in valuations and unexpected returns. Contrary to previous results in the literature, I conclude that individual stocks or portfolios look similar to the market. These findings are robust to short- and long-run regressions and hold when using dividends or (clean surplus accounting) earnings as cash flows. Finally, I present a simple present-value model with latent expected returns and dividend growth rates that explains most of these results.

Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation

Corporate tax reforms carried out in EU countries since 1980 entail lower statutory tax rates and reductions in generous tax depreciation provisions. Several countries including the UK have reduced tax rates for small and medium sized enterprises (SMEs). This study compares incentive effects of such reforms on the SMEs’ investment decisions adopting a simple present value model. Ceteris paribus, tax rates and depreciation rules vary in the model simulation, while the application of historical cost accounting method in inflationary phases leads to fictitious increases in nominal net present value. Apart from the construction of international ranking, country-specific patterns of reform effects are also illustrated.

Explosive bubbles in the cointegrated VAR model

The vector-autoregressive framework with explosive processes developed by Nielsen [2005. Working Paper. Nuffield College, Oxford University] is used to analyze US stock prices and dividends. In contrast to earlier studies, this framework makes it possible to model explosive behavior in stock prices while at the same time allowing stock prices and dividends to have a common I ( 1 ) trend. Over the period 1871–2000, US stock prices are found to contain both an explosive root and a unit root, and the unit root is shared with the unit root in dividends. These results are consistent with a simple present value model with explosive bubbles.

Effects of Corporate Tax Reforms on Smes' Investment Decisions Under the Particular Consideration of Inflation

Corporate tax reforms carried out in EU countries since 1980 entail lower statutory tax rates and reductions in generous tax depreciation provisions. Several countries, including the UK, have reduced tax rates for small and medium-sized enterprises (SMEs). This study compares incentive effects of such reforms on the SMEs' investment decisions adopting a simple present value model. Ceteris paribus tax rate and depreciation rule vary in the model simulation, while the application of a historical cost accounting method in inflationary phases leads to fictitious increases in nominal net present value. Apart from the construction of international rankings, country-specific patterns of reform effects are also illustrated.

Equilibrium time on the market (ETOM) for commercial real estate in the UK

Time on the market (TOM) has been widely tested in the US real estate literature using listing and selling data of houses captured in the multiple listing services (MLSs). Unfortunately in the UK there are no MLSs so it is not possible to undertake similar analyses. The approach adopted in this paper differs from traditional TOM analyses in that it focuses on the speed or time the market takes to correct for information differences between open market valuations and traded prices. In this context the paper introduces the concept of equilibrium time on the market (ETOM). The study therefore adopts a different approach to estimating TOM and in addition also examines the phenomenon within the UK commercial real estate sector. Based on a simple present value model, the time taken for the difference between an appraiser's estimate of open market value and known selling prices define our time on the market under equilibrium market conditions. Using the annualised UK Investment Property Databank all‐property total return index for a sample period of 17 years between 1983 and 1999, the average ETOM was estimated to be 8.4 months. This figure, however, varied and depended on market conditions.

The Comovement of US and UK Stock Markets

US and UK stock returns are highly positively correlated over the period 1918-1999. Using VAR-based variance decompositions, we investigate the nature of this comovement. Excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns. We find that the latter news component is the most important in explaining stock return volatility in both the US and the UK and that stock return news is highly correlated across countries. This is evidence against Beltratti and Shiller's (1993) finding that the comovement of US and UK stock markets can be explained in terms of a simple present value model. We interpret the comovement as indicating that equity premia in the two countries are hit by common real shocks.

The Comovement of US and UK Stock Markets

Abstract US and UK stock returns are highly positively correlated over the period 1918–99. Using VAR‐based variance decompositions, we investigate the nature of this comovement. Excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns. We find that the latter news component is the most important in explaining stock return volatility in both the USA and the UK and that stock return news is highly correlated across countries. This is evidence against Beltratti and Shiller's (1993) finding that the comovement of US and UK stock markets can be explained in terms of a simple present value model. We interpret the comovement as indicating that equity premia in the two countries are hit by common real shocks.

A Present Value Model of Real Estate with Inter-Neighborhood Dependency of Incomes

In this paper, we build a simple present value model in order to give the basis for an income capitalization appraisal method considering inter-neighborhood dependency of net operating incomes. We also show the Maximum Likelihood estimation method for the model in a cross-sectional situation and apply them to the residential land market in Tokyo Metropolitan Area in the period 1986-98. The results partly provide realistic estimates of the parameters and show the applicability of our model.

Variation of Share Prices Due to Fundamental and Non-fundamental Innovations

This paper examines the deviation of Australian stock prices from their fundamentals by decomposing stock price into four fundamental components and one non-fundamental component in three multivariate-moving-average models. The four components of stock prices, earnings, dividends, interest rates and excess stock returns are identified by the restrictions imposed on a SimsBernanke variance decomposition. Overall our findings suggest that, the stock price variability is only partially explained by fundamental factors as earnings and dividends, the rest can be due to time-varying interests and future excess stock returns. This conclusion further confirms the refection of simple present value model in determining stock price on the base of results from a time series dynamic framework.

Testing a present value model of forest land

The empirical validity of a simple present value model describing forest land prices according to economic fundamentals is examined. The implications of the model are derived and tested by use of time series econometric methods on Danish rent and price data in the period 1911–92. A necessary condition of the model is rejected by the data, probably due to an under parameterization of the model. An extension of the model, including the omitted variable, is suggested and discussed theoretically.

Excess Stock Price Volatility as a Misspecified Euler Equation

Speculative bubbles have been offered to explain the excess volatility results by Shiller (1981) and LeRoy and Porter (1981). Recent work by Flood, Hodrick, and Kaplan has shown that rational speculative bubbles cannot be the explanation for the excess volatility results. This paper provides an analytical framework for examining the hypothesis that the simple present value model used for the excess volatility studies is a misspecification of the true model. The method is applied to data from a market index and four large corporations. The results are consistent with the hypothesis that the simple present value model is not the correct specification for stock market pricing.