scholarly journals Earnings Expectations during the COVID-19 Crisis*

2020 ◽  
Vol 10 (4) ◽  
pp. 598-617 ◽  
Author(s):  
Augustin Landier ◽  
David Thesmar
Keyword(s):  
Risk Premium ◽  
Earnings Forecasts ◽  
Earnings Expectations ◽  
Forecast Revisions ◽  
Asset Risk ◽  
Equity Values ◽  
Oxford University ◽  
Risk Free Rate ◽  
Published Paper ◽  
Free Rate

Abstract We analyze the dynamics of earnings forecasts and discount rates implicit in valuations during the COVID-19 crisis. Forecasts over 2020 earnings have been progressively reduced by 16%. Longer-run forecasts have reacted much less. We estimate an implicit discount rate going from 8.5% in mid-February to 11% at the end of March and reverting to its initial level in mid-May. Over the period, the unlevered asset risk premium increases by 50bp, the leverage effect also increases by 50bp, while the risk free rate decreases by 100bp. Hence, analysts’ forecast revisions explain all of the decrease in equity values between January 2020 and mid-May 2020. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Development of the Risk Accumulation Method for Calculating the Capitalization Rate

2021 ◽  
pp. 7-14
Author(s):  
Nikolai Yu. Trifonov
Keyword(s):  
Risk Adjustment ◽  
Risk Premium ◽  
Stock Exchange ◽  
Country Risk ◽  
Monetary Unit ◽  
Capitalization Rate ◽  
Country Risk Premium ◽  
Risk Free Rate ◽  
The Relationship ◽  
Free Rate

Risk build-up method is the most used for calculating the capitalization rates. With the help of the literature analysis, the origin of this method is considered. The method was based on the relationship between risk and profitability of a stock in exchange trading, proven statistically. Later, when formulating the build-up method, this idea was transferred without any justification to the valuation of enterprises that do not list their securities on stock exchange. In other words, the formulas traditionally used in the application of the build-up method are empirical in nature and not precise.It is more accurate to write them down by analogy with Irwin Fisher's equation of returns. Based on the principle of dependence, one of the main ones for the valuation procedure, the essence of which is that the value of the valuation subject depends on its economic location, a set of four independent risks is given for use in the build-up method in general case: risk-free rate, country risk premium, branch risk premium, and subject risk adjustment. It is noted that the numerical value of these parameters used in the method fundamentally depends on the monetary unit used in the calculation (the valuation currency). Recommendations are given on finding a risk-free rate for various currencies, on calculating country risk premium, branch risk premium, and subject risk adjustment. The article is intended for academics, lecturers, and practitioners in such areas as corporate finance, business microeconomics, valuation, and investment analysis.

scholarly journals The Risk Averse Investor's Equilibrium Equity Premium in a Semi Martingale Market with Arbitrary Jumps

2016 ◽  
Vol 8 (6) ◽  
pp. 139
Author(s):  
George M. Mukupa ◽  
Elias R. Offen ◽  
Edward M. Lungu
Keyword(s):  
Utility Function ◽  
Risk Premium ◽  
Rare Event ◽  
Equity Premium ◽  
Risk Averse ◽  
Bond Price ◽  
Risk Free Rate ◽  
Negative Exponential ◽  
Exponential Utility Function ◽  
Free Rate

In this paper, we study the risk averse investor's equilibrium equity premium in a semi martingale market with arbitrary jumps. We realize that,  if we normalize the market, the equilibrium equity premium is consistent to taking the risk free rate $\rho=0$ in martingale markets. We also observe that the value process affects both the diffusive and rare-event premia except for the CARA negative exponential utility function. The bond price always affect the diffusive risk premium for this risk averse investor.

Identifying the News in Analysts’ Earnings Forecasts Revisions: An Alternative to the Random Walk Expectation

2021 ◽  
Author(s):  
Ray Pfeiffer ◽  
Karen Teitel ◽  
Susan Wahab ◽  
Mahmoud Wahab
Keyword(s):  
Random Walk ◽  
Stock Returns ◽  
Earnings Forecasts ◽  
Simple Random Walk ◽  
Analyst Forecast ◽  
Forecast Errors ◽  
Earnings Expectations ◽  
Forecast Revisions ◽  
Conditioning Information ◽  
Using Data

Previous research indicates that analysts’ forecasts are superior to time series models as measures of investors’ earnings expectations. Nevertheless, research also documents predictable patterns in analysts’ forecasts and forecast errors. If investors are aware of these patterns, analysts’ forecast revisions measured using the random walk expectation are an incomplete representation of changes in investors’ earnings expectations. Investors can use knowledge of errors and biases in forecasts to improve upon the simple random walk expectation by incorporating conditioning information. Using data from 2005 to 2015, we compare associations between market-adjusted stock returns and alternative specifications of forecast revisions to determine which best represents changes in investors’ earnings expectations. We find forecast revisions measured using a ‘bandwagon expectations’ specification, which includes two prior analysts’ forecast signals and provides the most improvement over random-walk-based revision measures. Our findings demonstrate benefits to considering information beyond the previously issued analyst forecast when representing investors’ expectations of analysts’ forecasts.

scholarly journals How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements

2013 ◽  
Vol 48 (2) ◽  
pp. 343-375 ◽  
Author(s):  
Pavel Savor ◽  
Mungo Wilson
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Asset Returns ◽  
Precautionary Saving ◽  
Macroeconomic News ◽  
Macroeconomic Risk ◽  
Equity Risk ◽  
Sharpe Ratios ◽  
Risk Free Rate ◽  
Free Rate

AbstractStock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement-day excess return from 1958 to 2009 is 11.4 basis points (bp) versus 1.1 bp for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is 10 times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

scholarly journals Limited Stock Market Participation and Asset Prices in a Dynamic Economy

2004 ◽  
Vol 39 (3) ◽  
pp. 495-516 ◽  
Author(s):  
Hui Guo
Keyword(s):  
Stock Market ◽  
Risk Premium ◽  
Stock Return ◽  
Precautionary Saving ◽  
Market Participation ◽  
Liquidity Premium ◽  
Stock Volatility ◽  
Stock Market Participation ◽  
Risk Free Rate ◽  
Free Rate

AbstractThis paper presents a consumption-based model that explains the equity premium puzzle through two channels. First, because of borrowing constraints, the shareholder cannot completely diversify his income risk and requires a sizable risk premium on stocks. Second, because of limited stock market participation, the precautionary saving demand lowers the risk-free rate but not stock return and generates a substantial liquidity premium. This model also replicates many other salient features of the data, including the first two moments of the risk-free rate, excess stock volatility, stock return predictability, and the unstable relation between stock volatility and the dividend yield.

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