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Article
Publication date: 1 April 2004

Osamah M. Al‐Khazali

This paper investigates the generalized Fisher hypothesis for nine equity markets in the Asian countries. It states that the real rates of return on common stocks and the expected

2280

Abstract

This paper investigates the generalized Fisher hypothesis for nine equity markets in the Asian countries. It states that the real rates of return on common stocks and the expected inflation rate are independent and that nominal stock returns vary in a one‐to‐one correspondence with the expected inflation rate. The regression results indicate that stock returns in general are negatively correlated to both expected and unexpected inflation, and that common stocks provide a poor hedge against inflation. However, the results of the VAR model indicate the lack of a unidirectional causality between stock returns and inflation. It also fails to find a consistent negative response neither of inflation to shocks in stock returns nor of stock returns to shocks in inflation in all countries. It appears that the generalized Fisher hypothesis in the Asian markets is as puzzling as in the developed markets.

Details

Journal of Economic Studies, vol. 31 no. 2
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that financial…

6362

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

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Open Access
Article
Publication date: 15 March 2024

Mohammadreza Tavakoli Baghdadabad

We propose a risk factor for idiosyncratic entropy and explore the relationship between this factor and expected stock returns.

Abstract

Purpose

We propose a risk factor for idiosyncratic entropy and explore the relationship between this factor and expected stock returns.

Design/methodology/approach

We estimate a cross-sectional model of expected entropy that uses several common risk factors to predict idiosyncratic entropy.

Findings

We find a negative relationship between expected idiosyncratic entropy and returns. Specifically, the Carhart alpha of a low expected entropy portfolio exceeds the alpha of a high expected entropy portfolio by −2.37% per month. We also find a negative and significant price of expected idiosyncratic entropy risk using the Fama-MacBeth cross-sectional regressions. Interestingly, expected entropy helps us explain the idiosyncratic volatility puzzle that stocks with high idiosyncratic volatility earn low expected returns.

Originality/value

We propose a risk factor of idiosyncratic entropy and explore the relationship between this factor and expected stock returns. Interestingly, expected entropy helps us explain the idiosyncratic volatility puzzle that stocks with high idiosyncratic volatility earn low expected returns.

Details

China Accounting and Finance Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1029-807X

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Article
Publication date: 12 February 2018

David DeBoeuf, Hongbok Lee, Don Johnson and Maksim Masharuev

The purpose of this paper is to contribute to financial managers’ capital budgeting decision-making processes by proposing a new paradigm of capital investment appraisal. The…

1541

Abstract

Purpose

The purpose of this paper is to contribute to financial managers’ capital budgeting decision-making processes by proposing a new paradigm of capital investment appraisal. The expected return, required return structure of the proposed purchasing power return (PPR) methodology eliminates the many flaws associated with the competing internal rate of return (IRR) and modified IRR (MIRR) techniques.

Design/methodology/approach

The authors provide a new framework for examining long-term investment projects through a percentage return prism. Unlike that of IRR and MIRR, mathematical consistency with net present value (NPV) is a design requirement.

Findings

PPR eliminates the many flaws found in the IRR and MIRR methodologies, is mathematically consistent with NPV, and identifies positive-NPV investments forecasted to reduce the company’s purchasing power. These projects are acceptable under NPV, but flagged for additional review and potential rejection. Created to examine projects on a percentage return basis, PPR employs market-based inflation rates to convert all cash flows into constant purchasing power units of measure. From these units, an expected real return is estimated and compared to the project’s inflation-adjusted required return, resulting in an accept/reject decision consistent with that of NPV.

Originality/value

The proposed PPR is a new paradigm of capital investment appraisal that eliminates the many problems found in the IRR and MIRR techniques, is mathematically consistent with the NPV method, and helps financial decision makers examine investment projects on an expected percentage return basis. PPR also flags for further review projects expected to actually reduce the company’s purchasing power.

Article
Publication date: 21 April 2011

Alan Gregory

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the…

1026

Abstract

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.

Details

Review of Behavioural Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1940-5979

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Article
Publication date: 8 July 2019

Christian Fieberg, Armin Varmaz and Thorsten Poddig

The purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor.

Abstract

Purpose

The purpose of this paper is to analyze the implications of the risk versus characteristic debate from the perspective of a mean-variance investor.

Design/methodology/approach

Expected returns and the variance-covariance matrix are estimated based on various characteristic and risk models and evaluated for the purpose of mean-variance portfolios.

Findings

Return estimates from characteristic models are most informative to investors. Risk-factor models provide the most informative estimates of the risk. A mean-variance investor should rely on combinations of the two model types.

Originality/value

Although the risk vs characteristic debate is a binary academic debate, our findings from an investor's perspective suggest to make use of the best of both worlds.

Details

The Journal of Risk Finance, vol. 20 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 2 February 2015

Ray Ball and Gil Sadka

The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop…

Abstract

The accounting literature has traditionally focused on firm-level studies to examine the capital market implications of earnings and other accounting variables. We first develop the arguments for studying capital market implications at the aggregate level as well. A central issue is that diversification makes equity investors at least partially and potentially almost completely immune to several firm-level properties of earnings by holding diversified portfolios. Diversification is particularly important when assessing the welfare consequences of random errors in accounting measurement (imperfect accruals) and, to the extent it is independent across firms, of deliberate manipulation (earnings management). Consequently, some firm-level metrics of association, timeliness, value relevance, conservatism and other earnings properties do not map easily into investor welfare. Similarly, earnings-related risk manifests itself to equity investors largely through systematic earnings risk (covariation with aggregate earnings and/or other macroeconomic indicators). We conclude that the design and evaluation of financial reporting must adopt at least in part an aggregate perspective. We then summarize the literature in accounting, economics and finance on aggregate earnings and stock prices. Our review highlights the importance of studying earnings at the aggregate level.

Details

Journal of Accounting Literature, vol. 34 no. 1
Type: Research Article
ISSN: 0737-4607

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Article
Publication date: 1 April 2000

HELMUT MAUSSER and DAN ROSEN

The risk/return trade‐off has been a central tenet of portfolio management since the seminal work of Markowitz [1952]. The basic premise, that higher (expected) returns can only…

Abstract

The risk/return trade‐off has been a central tenet of portfolio management since the seminal work of Markowitz [1952]. The basic premise, that higher (expected) returns can only be achieved at the expense of greater risk, leads naturally to the concept of an efficient frontier. The efficient frontier defines the maximum return that can be achieved for a given level of risk or, alternatively, the minimum risk that must be incurred to earn a given return. Traditionally, market risk has been measured by the variance (or standard deviation) of portfolio returns, and this measure is now widely used for credit risk management as well. For example, in the popular Credit‐Metrics methodology (J.P. Morgan [1997]), the standard deviation of credit losses is used to compute the marginal risk and risk contribution of an obligor. Kealhofer [1998] also uses standard deviation to measure the marginal risk and, further, discusses the application of mean‐variance optimization to compute efficient portfolios. While this is reasonable when the distribution of gains and losses is normal, variance is an inappropriate measure of risk for the highly skewed, fat‐tailed distributions characteristic of portfolios that incur credit risk. In this case, quantile‐based measures that focus on the tail of the loss distribution more accurately capture the risk of the portfolio. In this article, we construct credit risk efficient frontiers for a portfolio of bonds issued in emerging markets, using not only the variance but also quantile‐based risk measures such as expected shortfall, maximum (percentile) losses, and unexpected (percentile) losses.

Details

The Journal of Risk Finance, vol. 2 no. 1
Type: Research Article
ISSN: 1526-5943

Article
Publication date: 1 December 1997

J.A. Schofield

Between 1981 and 1994, the UK commercial property market (IPD) delivered a total return of 9.9 per cent each year, 4.2 per cent each year in real terms. Over the same period, the…

6255

Abstract

Between 1981 and 1994, the UK commercial property market (IPD) delivered a total return of 9.9 per cent each year, 4.2 per cent each year in real terms. Over the same period, the real return on UK equities and UK gilts was 11.6 per cent and 6.9 per cent respectively, it is important to account for the poor performance of property. Other than a model which attributes performance to income return and capital return, there are few models that attempt to account for this. This model is simply descriptive. The responsiveness of the return on commercial property to inflation is crucial to pension funds, the liabilities of which are often wage‐linked. Establishes auto‐regressive expectations of real ERV growth and inflation. Presents a model of the simulated lease structure of the IPD. States the main cause of the under‐performance was the increase in the required return on property over the period. Between 1980 and 1994, long‐term expectations of inflation fell. Concludes by stating the existence of over‐rented properties, after the decline in rents in the early 1990s, had a large impact on he relative influence of inflation and real ERV growth. Over‐renting increases the impact of unexpected inflation and changes in expected inflation and reduces the impact of unexpected real ERV growth and changes in expected real ERV growth. In fact, the impact of unexpected inflation in an over‐rented environment is bigger than the impact of unexpected real ERV growth.

Details

Journal of Property Finance, vol. 8 no. 4
Type: Research Article
ISSN: 0958-868X

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Article
Publication date: 20 August 2019

Nick French

The purpose of this paper is to discuss the principal measures of performance used in property and other investment types. In particular, the briefing will explore the…

Abstract

Purpose

The purpose of this paper is to discuss the principal measures of performance used in property and other investment types. In particular, the briefing will explore the relationship of the expected IRR with the initial return, highlighting the role of growth in the investment dynamic.

Design/methodology/approach

This education briefing is an overview of investment growth models with worked examples.

Findings

The analysis of property growth models is akin to the Fisher and Gordon growth models used in other finance markets.

Practical implications

This comparison of the models can work for all forms of investment. Similarly, instead of looking at the overall return as the measure of comparison (expected vs required), it is possible to work backwards and deduce market expectations and compare these with the investors view on those variables.

Originality/value

This is a review of existing models.

Details

Journal of Property Investment & Finance, vol. 37 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

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