Systematic Mispricing in European Equity Prices?

One empirical argument that has been around for some time and that clearly contra- dicts equity market efficiency is that market prices seem too volatile to be optimal estimates of the present value of future discounted cash flows. Based on this, it is deduced that systematic pricing errors occur in equity markets which hence can not be efficient in the Effcient Market Hypothesis sense. The paper tries to show that this so-called excess volatility is to a large extend the result of the underlying assumptions, which are being employed to estimate the present value of cash flows. Using monthly data for three investment style indices from an integrated European Equity market, all usual assumptions are dropped. This is achieved by employing the Gordon Growth Model and using an estimation process for the dividend growth rate that was suggested by Barsky and De Long. In extension to Barsky and De Long, the discount rate is not assumed at some arbitrary level, but it is estimated from the data. In this manner, the empirical results do not rely on the prerequisites of sta- tionary dividends, constant dividend growth rates as well as non-variable discount rates. It is shown that indeed volatility declines considerably, but is not eliminated. Furthermore, it can be seen that the resulting discount factors for the three in- vestment style indices can not be considered equal, which, on a risk-adjusted basis, indicates performance differences in the investment strategies and hence stands in contradiction to an efficient market. Finally, the estimated discount rates under- went a plausibility check, by comparing their general movement to a market based interest rate. Besides the most recent data, the estimated discount rates match the movements of market interest rates fairly well.equity market efficiency, discounted cashflow, excess volatility, variance bound test, rational expectations

Excess Volatility in European Equity Style Indices - New Evidence

Are financial markets efficient? One proposition that seems to contradict this is Shiller’s finding of excess volatility in asset prices and its resulting rejection of the discounted cash flow model. This paper replicates Shiller’s approach for a different data set and extends his analysis by testing for a long-run relationship by means of a cointegration analysis. Contrary to previous studies, monthly data for an integrated European stock market is being used, with special attention to equity style investment strategies. On the basis of this analysis’ results, Shiller’s findings seem questionable. While a long-run relationship between prices and dividends can be observed for all equity styles, a certain degree, but to a much smaller extent than in Shiller’s approach, of excess volatility cannot be rejected. But it seems that a further relaxation of Shiller’s assumptions would completely eliminate the finding of an overly strong reaction of prices to changes in dividends. Two interesting side results are, that all three investment styles seem to have equal performance when adjusting for risk, which by itself is an indication for efficiency and that market participants seem to use current dividend payments from one company as an indication for future dividend payments by other firms. Overall the results of this paper lead to the conclusion that efficiency cannot be rejected for an integrated European equity market.equity market efficiency, discounted cashflow, excess volatility, variance bound test, cointegration tests

Are European Equity Style Indexes Mean Reverting? Testing the Validity of the Efficient Market Hypothesis

The article tests for a random walk in European equity style indexes. After briefly introducing the efficient market hypothesis, equity styles in general and the used statistical techniques (Variance Ratio Test and modified Rescaled Range Test) it is shown that a random walk in European equity style indexes cannot be rejected. At least in the period since the mid 70s, for which this research has been conducted, the weak form efficient market hypothesis seems to hold.efficient market hypothesis, variance ratio test, rescaled range test, equity style investment

Do Consumers' Stated Preferences in Choice Models Depend on Differences in Stimulus Presentation: 2D versus 3D Presentation?

This study tries to contribute to the branch of research that is engaged in the analysis of different stimulus presentation formats and their influence on quality and validity of the test results in a Conjoint Analysis. This topic has gained special attention as new techniques became available that enable the inclusion of holographic three-dimensional stimuli in the research of consumers' preferences. Especially for examining design-related questions this proves very interesting. The study compares the results of two Choice Based Conjoint analyses with one presenting the test object via computer-based 2D-pictures and the other using a holographic 3D-simulation. For the attributes at hand no differences between the results of the 2D- and 3D-test can be isolated on an aggregate level

Composite Leading Indicators der amerikanischen Wirtschaft - Prognosegüte des Conference Board und des OECD Ansatzes im Vergleich

The Paper analyses both the Conference Board as well as the OECD Leading Indicators concerning their forecasting properties of overall economic activity. For this purpose the two indicators are introduced separately and several in-sample and out-of-sample tests are being conducted. The main focus, apart from other methods, is being laid on coherence tests as well as the Diebold/Mariano test. In contrast to many other analyses dealing with this topic, the chosen reference series is not industrial production, but rather the coincident index, as reported by the conference board. It seems as if both indicators show some sign of correlation to overall economic activity, but at the same time fail to improve on the forecasts of a simple time series model.

Treiben Immobilienpreise die gesamtwirtschaftliche Konsumnachfrage?

In recent times increasing house prices have been credited with a stong positive influence on aggre-gate consumption. But it is questionable in how far higher prices are at all able to lift the purchasing power of the economy as whole: The seller’s profit of a high price, equals the buyer’s loss. But while a positive correlation between house prices and consumption is evident, it is not a sign of irra-tional behaviour by market participants. In fact it seems that both factors are driven by other pa-rameters: the interest rate and expectations about future interest rates and economic activity. For a selection of four developed countries, the follow-ing article tries to give an explanation for the house price developments of the past 15 years. While disregarding country specific risk as well as institutional aspects and demographic factors, a present value caluclation forms the basis for esti-mating a fundamentally justified price movement. Expectations for future rents and discount rates are being proxied by a moving average of past values. It can be observed how interest rate changes and long-run economic growth, two as-pects that clearly also drive private consumption, play a key role here.

Treiben Immobilienpreise die gesamtwirtschaftliche Konsumnachfrage?

In recent times increasing house prices have been credited with a stong positive influence on aggre-gate consumption. But it is questionable in how far higher prices are at all able to lift the purchasing power of the economy as whole: The seller’s profit of a high price, equals the buyer’s loss. But while a positive correlation between house prices and consumption is evident, it is not a sign of irra-tional behaviour by market participants. In fact it seems that both factors are driven by other pa-rameters: the interest rate and expectations about future interest rates and economic activity. For a selection of four developed countries, the follow-ing article tries to give an explanation for the house price developments of the past 15 years. While disregarding country specific risk as well as institutional aspects and demographic factors, a present value caluclation forms the basis for esti-mating a fundamentally justified price movement. Expectations for future rents and discount rates are being proxied by a moving average of past values. It can be observed how interest rate changes and long-run economic growth, two as-pects that clearly also drive private consumption, play a key role here.

Asymptotic Stability of Active Disturbance Rejection Control for Linear SISO Plants with Low Observer Gains

This paper theoretically investigates the closed-loop performance of active disturbance rejection control (ADRC) on a third-order linear plant with relative degree 3, subject to a class of exogenous disturbances. While PID control cannot be guaranteed to be capable of stabilizing such plants, ADRC offers a model-free alternative. However, many existing works on ADRC consider the observer gains to be taken arbitrarily large, in order to guarantee desired performance, such as works which consider parameterizing ADRC by bandwidth. This work finds that, for constant exogenous disturbances, arbitrary eigenvalue assignment is possible for the closed-loop system under linear ADRC, thus guaranteeing the existence of an ADRC controller for desired performance without taking any gains arbitrarily large. We also find that stabilization is possible when the exogenous disturbance is stable, and show how ADRC can recover the performance of model-based observers. We demonstrate aspects of the resulting closed-loop systems under ADRC in simulations

The Eater and the Mover Game

This paper studies the idea of ``deception by motion'' through a two-player dynamic game played between a Mover who must retrieve resources at a goal location, and an Eater who can consume resources at two candidate goals. The Mover seeks to minimize the resource consumption at the true goal, and the Eater tries to maximize it. While the Mover has the knowledge about the true goal, the Eater cannot differentiate between the two candidates. Unlike existing works on deceptive motion control that measures the deceptiveness through the quality of inference made by a distant observer (an estimator), we incorporate their actions to directly measure the efficacy of deception through the outcome of the game. An equilibrium concept is then proposed without the notion of an estimator. We further identify a pair of equilibrium strategies and demonstrate that if the Eater optimizes for the worst-case scenario, hiding the intention (deception by ambiguity) is still effective, whereas trying to fake the true goal (deception by exaggeration) is not.Comment: Submitted to the IEEE Control Systems Letters (L-CSS), 202