Investors face numerous challenges when seeking to estimate the prospective performance of a longonly investment in commodity futures. For instance, historically, the average annualized excess retu...

The Strategic and Tactical Value of Commodity Futures

International Momentum Strategies

Plug-in hybrid electric vehicles are a midterm solution to reduce the transportation sector's dependency on oil. However, if implemented in a large scale without control, peak load increases significantly and the grid may be overloaded. Two algorithms to address this problem are proposed and analyzed. Both are based on a forecast of future electricity prices and use dynamic programming to find the economically optimal solution for the vehicle owner. The first optimizes the charging time and energy flows. It reduces daily electricity cost substantially without increasing battery degradation. The latter also takes into account vehicle to grid support as a means of generating additional profits by participating in ancillary service markets. Constraints caused by vehicle utilization as well as technical limitations are taken into account. An analysis, based on data of the California independent system operator, indicates that smart charge timing reduces daily electricity costs for driving from $0.43 to $0.2. Provision of regulating power substantially improves plug-in hybrid electric vehicle economics and the daily profits amount to $1.71, including the cost of driving.

Optimal Charge Control of Plug-In Hybrid Electric Vehicles in Deregulated Electricity Markets

This chapter reviews the behavior of financial asset prices in relation to consumption. The chapter lists some important stylized facts that characterize U.S. data, and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the U.S. experience apply more generally. The chapter argues that to make sense of asset market behavior one needs a model in which the market price of risk is high, time-varying, and correlated with the state of the economy. Models that have this feature, including models with habit-formation in utility, heterogeneous investors, and irrational expectations, are discussed. The main focus is on stock returns and short-term real interest rates, but bond returns are also considered.

Consumption-based asset pricing

Recent research on the equity risk premium has questioned the ability of historical estimates of the risk premium to provide reliable estimates of the expected risk premium. We calculate the equity risk premium for a number of countries over longer horizons than has been attempted to date. We show that the realised US equity premium is consistent with the premia obtained elsewhere. Furthermore, using well over a century of data, we find that current estimates of the equity premia are close to those observed during the pre-1914 era. This is of particular relevance given the argument that the financial environment during that period bears a closer resemblance to today than the 1914-1945 period, and possibly also the 1945-1971 period. This points to a current equity risk premium that is considerably lower than consensus forecasts (Welch 2001).

The Equity Premium

Investors have too often extrapolated from recent experience. In the 1950s, who but the most rampant optimist would have dreamt that over the next fifty years the real return on equities would be 9% per year? Yet this is what happened in the U.S. stock market. The optimists triumphed. However, as Don Marquis observed, an optimist is someone who never had much experience. The authors of this book extend our experience across regions and across time. They present a comprehensive and consistent analysis of investment returns for equities, bonds, bills, currencies and inflation, spanning sixteen countries, from the end of the nineteenth century to the beginning of the twenty-first. This is achieved in a clear and simple way, with over 130 color diagrams that make comparison easy.Crucially, the authors analyze total returns, including reinvested income. They show that some historical indexes overstate long-term performance because they are contaminated by survivorship bias and that long-term stock returns are in most countries seriously overestimated, due to a focus on periods that with hindsight are known to have been successful.The book also provides the first comprehensive evidence on the long-term equity risk premium--the reward for bearing the risk of common stocks. The authors reveal whether the United States and United Kingdom have had unusually high stock market returns compared to other countries. The book covers the U.S., the U.K., Japan, France, Germany, Canada, Italy, Spain, Switzerland, Australia, the Netherlands, Sweden, Belgium, Ireland, Denmark, and South Africa.Triumph of the Optimists is required reading for investment professionals, financial economists, and investors. It will be the definitive reference in the field and consulted for years to come.

Triumph of the Optimists: 101 Years of Global Investment Returns

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Triumph of the Optimists

We use a new database of long-run stock, bond, bill, inflation, and currency returns to estimate the equity risk premium for 17 countries and a world index over a 106-year interval. Taking U.S. Treasury bills (government bonds) as the risk-free asset, the annualised equity premium for the world index was 4.7% (4.0%). We report the historical equity premium for each market in local currency and US dollars, and decompose the premium into dividend growth, multiple expansion, the dividend yield, and changes in the real exchange rate. We infer that investors expect a premium on the world index of around 3-3 1/2% on a geometric mean basis, or approximately 4 1/2-5% on an arithmetic basis.

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The Worldwide Equity Premium: A Smaller Puzzle

The size of the equity risk premium—the incremental return that shareholders require to hold risky equities rather than risk-free securities—is a key issue in corporate finance. Financial economists generally measure the equity premium over long periods of time in order to obtain reliable estimates. These estimates are widely used by investors, finance professionals, corporate executives, regulators, lawyers, and consultants. But because the 20th century proved to be a period of such remarkable growth in the U.S. economy, estimates of the risk premium that rely on past market performance may be too high to serve as a reliable guide to the future.

The authors analyze a 103-year history of risk premiums in 16 countries and conclude that the U.S. risk premium relative to Treasury bills was 5.3% for that period—lower than previous studies suggest—as compared to 4.2% for the U.K. and 4.5% for a world index. But the article goes on to observe that the historical record may still overstate expectations of the future risk premium, partly because market volatility in the future may be lower than in the past, and partly because of a general decline in risk resulting from new technological advances and increased diversification opportunities for investors. After adjusting for the expected impact of these factors, the authors calculate forward-looking equity risk premiums of 4.3% for the U.S., 3.9% for the U.K., and 3.5% for the world index. At the same time, however, they caution that the risk premium can fluctuate over time and that managers should make appropriate adjustments when there are compelling economic reasons to think that expected premiums are unusually high or low.

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Global evidence on the equity risk premium

Responsible investors require data to underpin their stock and sector selections. Regardless of the rating agency, bond ratings for a particular issuer are broadly similar. This is not the case for ESG ratings. Companies with a high score from one rater often receive a middling or low score from another rater. This article examines the extent of, and reasons for, disagreement among the leading suppliers of ESG ratings. The weightings given to each pillar of an ESG rating also vary across agencies. Many asset managers contend that ESG ratings can help investors to select assets with superior financial prospects, and the authors therefore review the investment performance of portfolios and of indexes screened for their ESG credentials. In the authors’ opinion, ESG ratings, used in isolation, are unlikely to make a material contribution to portfolio returns. TOPICS:Equity portfolio management, ESG investing, foundations and endowments, performance measurement, wealth management Key Findings • Data is essential for making investment decisions, and most institutions rely wholly or partly on external providers of ESG data. However, there is minimal correlation between ESG ratings from alternative agencies. • This article explains why different raters’ appraisals diverge. The article also examines whether ESG is associated with subsequent fund or index outperformance. • Over the longest available period, ESG indexes did not outperform the “parent” index from which they are derived. Equally, however, for the two indexes that most closely represent what ESG investors actually do (FTSE4GOOD and MSCI-ESG) there is no evidence of underperformance.

Mike Staunton

Papers

Triumph of the Optimists: 101 Years of Global Investment Returns

Triumph of the Optimists

The Worldwide Equity Premium: A Smaller Puzzle

Global evidence on the equity risk premium

Divergent ESG Ratings