Valuation and arbitrage

The use of discounted cash flow (DCF) methods in investment valuation and appraisal is argued by many academics as being rational and more rigorous than the traditional capitalisation model. However those advocates of DCF should be cautious in their claims for rationality. The various DCF models all rely upon an all-encompassing equated yield (IRR) within the calculation. This paper will argue that this is a simplification of the risk perception which the investor places on the income profile from property. In determining the long term capital value of a property an 'average' DCF method will produce the 'correct' price, however, the individual short term values of each cash-flow may differ significantly. In the UK property market today, where we are facing a period in which prices are not expected to rise generally at the same rate or with such persistence as hitherto, investors and tenants are increasingly concerned with the down side implications of rental growth and investors may indeed be interested in trading property over a shorter investment horizon than they had originally planned. The purpose of this paper is therefore to bring to the analysis a rigorous framework which can be used to analyse the constituent cash flows within the freehold valuation. We show that the arbitrage analysis lends itself to segregating the capital value of the cash flows in a way which is more appropriate for financial investors

Europe’s biocidal products directive: benefits and costs in urban pest management

The European Commission’s Biocidal Products Directive (Council Directive 98/8 EC), known as the BPD, is the largest regulatory exercise ever to affect the urban pest control industry. Although focussed in the European Union its impact is global because any company selling pest control products in the EU must follow its principles. All active substances, belonging to 23 different biocidal product types, come within the Directive’s scope of regulatory control. This will eventually involve re-registration of all existing products, as well as affecting any new product that comes to the market. Some active substances, such as the rodenticides and insecticides, are already highly regulated in Europe but others, such as embalming fluids, masonry preservatives, disinfectants and repellents/attractants will come under intensive regulatory scrutiny for the first time. One of the purposes of the Directive is to offer enhanced protection for human health and the environment. The potential benefit for suppliers of pest control products is mutual recognition of regulatory product dossiers across 25 Member States of the European Union. This process, requiring harmonisation of all regulatory decision-making processes, should reduce duplicated effort and, potentially, allow manufacturers speedier access to European markets. However, the cost to industry is enormous, both in terms of the regulatory resources required to assemble BPD dossiers and the development budgets required to conduct studies to meet its new standards. The cost to regulatory authorities is also tremendous, in terms of the need to upgrade staff capabilities to meet new challenges and the volume of the work expected by the Commission when they are appointed the Rapporteur Member State (RMS) for an active substance. Users of pest control products will pay a price too. The increased regulatory costs of maintaining products in the European market are likely to be passed on, at least in part, to users. Furthermore, where the costs of meeting new regulatory requirements cannot be recouped from product sales, many well-known products may leave the market. For example, it seems that in future few rodenticides that are not anticoagulants will be available within the EU. An understanding of the BPD is essential to those who intend to place urban pest control products on the European market and may be useful to those considering the harmonisation of regulatory processes elsewhere. This paper reviews the operation of the first stages of the BPD for rodenticides, examines the potential benefits and costs of the legislation to the urban pest control industry and looks forward to the next stages of implementation involving all insecticides used in urban pest management.

A review of the costs and benefits of demand response for electricity in the UK

The recent policy discussion in the UK on the economic case for demand response (DR) calls for a reflection on available evidence regarding its costs and benefits. Existing studies tend to consider the size of investments and returns of certain forms of DR in isolation and do not consider economic welfare effects. From review of existing studies, policy documents, and some simple modelling of benefits of DR in providing reserve for unforeseen events, we demonstrate that the economic case for DR in UK electricity markets is positive. Consideration of economic welfare gains is provided.

Transatlantic Relations: Sharing Ideals and Costs

A study of European relations with the USA and Canada after the end of the Cold War

Bayesian estimation of the double hurdle model in the presence of fixed costs

We present a model of market participation in which the presence of non-negligible fixed costs leads to random censoring of the traditional double-hurdle model. Fixed costs arise when household resources must be devoted a priori to the decision to participate in the market. These costs, usually of time, are manifested in non-negligible minimum-efficient supplies and supply correspondence that requires modification of the traditional Tobit regression. The costs also complicate econometric estimation of household behavior. These complications are overcome by application of the Gibbs sampler. The algorithm thus derived provides robust estimates of the fixed-costs, double-hurdle model. The model and procedures are demonstrated in an application to milk market participation in the Ethiopian highlands.

Cross-country effects of regulatory capital arbitrage

One reason for the recent asset price bubbles in many developed countries could be regulatory capital arbitrage. Regulatory and legal changes can help traditional banks to move their assets off their balance sheets into the lightly regulated shadows and thus enable regulatory arbitrage through the securitized sector. This paper adopts a global vector autoregression (GVAR) methodology to assess the effects of regulatory capital arbitrage on equity prices, house prices and economic activity across 11 OECD countries/ regions. A counterfactual experiment disentangles the effects of regulatory arbitrage following a change in the net capital rule for investment banks in April 2004 and the adoption of the Basel II Accord in June 2004. The results provide evidence for the existence of an international finance multiplier, with about half of the countries overshooting U.S. impulse responses. The counterfactual shows that regulatory arbitrage via the U.S. securitized sector may enhance the cross-country reallocation of capital from housing markets towards equity markets.

Regulating vertical relations in the presence of retailer differentiation costs

We discuss public policy towards vertical relations, comparing different types of contracts between a manufacturer and a maximum of two retailers. Together with (potential) price competition between the retailers, we study the role of a (sunk) differentiation cost paid by them in order to relax competition in the retail market and broaden the market potential of the distributed product. This non-price competition element in the downstream market is responsible for our conclusion that, unlike in standard policy guidelines and previous theoretical analysis, restrictions in intra-brand competition may deserve a permissive treatment even in the absence of inter-brand competition, if retailer differentiation is costly.

Administrative costs of regulation and foreign direct investment: evidence from Standard Cost Model implementation in non-OECD countries

In recent years both developed and developing countries have experienced an increasing number of government initiatives dedicated to reducing the administrative costs (AC) imposed on businesses by regulation. We use a bi-linear fixed-effects model to analyze the extent to which government initiatives to reduce AC through the Standard Cost Model (SCM) attract Foreign Direct Investment (FDI) among 32 developing countries. Controlling for standard determinants of the SCM, we find that the SCM in most cases leads to higher FDI and that the benefits are more significant where the SCM has been implemented for a longer period.

Transaction costs, information technologies and the choice of marketplace among farmers in Northern Ghana

Using a transactions costs framework, we examine the impact of information and communication technologies (mobile phones and radios) use on market participation in developing country agricultural markets using a novel transaction-level data set of Ghanaian farmers. Our analysis of the choice of markets by farmers suggests that market information from a broader range of markets may not always induce farmers to sell in more distant markets; instead farmers may use broader market information to enhance their bargaining power in closer markets. Finally, we find weak evidence on the impact of using mobile phones in attracting farm gate buyers.