Asset returns and inflation

The purpose of this paper is to present a methodology based on the transactional asset pricing approach (TAPA) and to illustrate the application of TAPA within the context of professional property valuation.,The TAPA is a novel analytical valuation methodology recasting the traditional derivations of the income approach techniques, including DCF, from a transactional perspective based on the principle of inter-temporal transactional equity, instead of the conventional investor-specific view originating from I. Fisher (1907, 1930).,The authors present DCF analysis as a specific case of a more general TAPA approach to valuation under the income method. This also leads to novel analytical derivations of the Direct income capitalization, Gordon, Inwood, Hoskold and Ring models. Based on the TAPA framework, the authors also research the value-enhancing effects of benchmark market volatility on the subject property value and conclude that such effects can be statistically significant depending on the DCF analysis period.,The research has a direct bearing on time-variable discount rate forecasting capabilities, as it uses a time-variant structure for the discount rates.,Using the US Case-Shiller and BLS rental indices as a valuation benchmark, the paper contains an example of applying the general TAPA framework to value a notional property under a TAPA’s DCF version. Such property valuations can be easily replicated in practice – especially in the context of equitable/fair value determination under the International Valuation Standards Council valuation standards.,TAPA is a deductive principles-based theory of asset valuation especially fit for the transactional and illiquid asset valuation contexts – thus enabling a more efficient pricing for such assets in a sense of reflecting the transactional interests of the parties more closely than achievable under the conventional valuation methods.,TAPA is an original filiation of research with roots going as far back as Aristotelian Catallactics. It contains analytical formalizations of certain transactional equity principles.

The transactional asset pricing approach: Its general framework and applications for property markets

This article studies time variation in the expected excess returns of traded claims on dividends, bonds, and stock indices for international markets. We introduce a novel dividend risk factor that complements the bond risk factor of Cochrane and Piazzesi (2005). By aggregating over 4 regions (United States, United Kingdom, Eurozone, and Japan), we create global dividend and bond factors. Our global 2-factor model captures the excess returns of most Morgan Stanley Capital International (MSCI) country indices, as well as a variety of other test assets. Our findings highlight the value of the information contained in dividend and bond forward curves and suggest substantial comovement in international risk premia.

Dividend Risk Premia

This paper studies time variation in expected excess returns of traded claims on dividends, bonds, and stock indices for international markets. We introduce a novel dividend risk factor which complements the well-known bond risk factor of Cochrane and Piazzesi (2005) for the U.S., the U.K., the Eurozone and Japan, and run predictive regressions of one-year annual excess returns on both risk factors. Employing our dividend risk factor and the bond risk factor jointly we are able to fit the variation in local stock index returns well. By aggregating over the factors of the four core regions, we create global dividend and bond risk factors which capture excess returns of most of the developed market MSCI country indices as well as a variety of other assets including high yield bonds and a volatility selling strategy. Our findings highlight the value of the information contained in the dividend and bond forward curves and suggest substantial comovement in international risk premia.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2812594_code284977.pdf?abstractid=2725073&mirid=5

Abstract We test whether asymmetric preferences for losses versus gains affect the prices of cash flow versus discount rate risk. We construct a return decomposition distinguishing cash flow and discount rate betas in up and down markets. Using U.S. data, we find that downside cash flow and discount rate betas carry the largest premia. Downside cash flow risk is priced consistently across different samples, periods, and return decomposition methods. It is the only component of beta with significant out-of-sample predictive ability. Downside cash flow premia mainly occur for small stocks, while large stocks are compensated for symmetric cash-flow-related risk.

Cash flow and discount rate risk in up and down markets: What is actually priced?

Discount rate variation is driven by a short run business cycle component and a longer run trend component. This leads to state variable hedging of these two components and ICAPM logic implies a three factor model for expected returns. One factor represents cash flow news and the two other factors represent short term and long term discount rate news. News about both these discount rate components is important in describing the cross section of stock returns. Consistent with the predictions of leading asset pricing models, long run discount rate news is priced consistently across different samples and specifications and commands a higher risk premium than short run discount rate news.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2695835_code327091.pdf?abstractid=2695835&mirid=1

Junhua Zhong

Papers

The Factor Structure of Time-Varying Discount Rates