Though Practitioners and academics rely on similar conceptual frameworks when valuing international equities in general and emerging equities in particular, they emphasize different aspects of the framework.In contrast to academics, practitioners adjust discount rates as opposed to cash flows, and use the U.S. instead of the global equity market risk premium. Continue Reading →
Academic Publications
Funding Strategies in a Rising Interest Rate and Flattening Yield Curve Environment
Global Equity Investing: An efficient frontier approach
The Macroeconomic Outlook and Liability Management Strategies
The current macroeconomic outlook presents a duality: On the one hand, Federal Reserve forecasters believe that short-term rates will remain excessively low (0-25 basis points) for a prolonged time period, possibly extending into 2015. On the other hand, the balance sheet of the Federal Reserve has nearly tripled ($850 billion versus approximately $3 trillion) since the onset of the great contraction of 2007 – 2009, possibly suggesting skyrocketing future inflation accompanied by skyrocketing interest rates. Continue Reading →
Excess Cash and Shareholder Payout Strategies
Published in Journal of Applied Corporate Finance Vol. 24 Issue 3 (Summer 2012):
According to conventional wisdom, the most likely payers of dividends are large, “mature” companies whose operations generate far more cash flow than they can profitably reinvest in their core businesses. That description applies to many so-called“value” companies—companies that are generally identified by their relatively low growth rates and P/E multiples. But in recent years, the ranks of high-dividend-paying companies have expanded to include a number of high-tech giants such as Microsoft (MSFT), IBM, and, most recently, Apple—companies that, at least until fairly recently, have all been viewed as “growth” companies…
Issuing 50 to 100-Year Bonds
In 2010-2011, investment-grade borrowers such as the California Institute of Technology (Caltech), Norfolk Southern Corporation, Rabobank Netherlands, United Mexican States (UMS), the Massachusetts Institute of Technology (MIT), and the University of Southern California issued 100-year bonds with no call provisions; and the Tennessee Valley Authority (TVA) issued a 50-year bond with no call provisions. AAA-rated TVA’s 50-year bond, and BBB-rated UMS’s 100-year bond had coupons of 4.625%, and 6.125%, respectively. Also in the same period, Goldman Sachs twice issued 50-year bonds with attractively-priced five-year call provisions, as the retail market traditionally under prices bond call options.
Similar to Goldman Sachs, Telephone and Data Systems Inc, and its subsidiary United States Cellular Corp issued retail-targeted 49 NC-5s (non-calls) with attractively priced call provisions. Continue Reading →
Valuing Emerging Market Equities – The Empirical Evidence
Though practitioners and academics rely on similar conceptual frameworks when valuing international equities in general and emerging market equities in particular, they emphasize different aspects of the framework. In contrast to academics, practitioners adjust discount rates as opposed to cash flows, and use the US as opposed to the global equity market risk premium. After summarizing the arguments on the academic and practitioner sides, this paper lets the data do the judging and presents evidence that US dollar returns on emerging market equities (American Depository Receipts, ADRs) primarily are a function of returns on the broad US equity market (e.g., the S&P 500) and on the corresponding country’s credit default swap (CDS) spreads.
Valuing Illiquid Equity Securities in Light of the Financial Crisis of 2007- 2009
Though practitioners and academics rely on similar conceptual frameworks when valuing illiquid equity securities, they emphasize different aspects of the framework. In contrast to academics, practitioners emphasize market multiples, implied equity market risk premiums, industry betas, and market sentiment; while deemphasizing delevering and relevering betas, debt betas, and historical equity market risk premiums. Continue Reading →
Purchasing Power Parity in the Long Run (Abuaf, Jorion)
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This paper re-examines the evidence on Purchasing Power Parity (PPP) in the long
run. Previous studies have generally been unable to reject the hypothesis that the real
exchange rate follows a random walk. If true, this implies that PPP does not hold. In
contrast, this paper casts serious doubt on this random walk hypothesis. The results
follow from more powerful estimation techniques, applied in a multilateral framework.
Deviations from PPP, while substantial in the short run, appear to take about three
years to be reduced in half.