The accuracy of the escrowed dividend model on the value of European options on a stock paying discrete dividend

This project characterizes the accuracy of the escrowed dividend model on the value of European options on a stock paying discrete dividend. A description of the escrowed dividend model is provided, and a comparison between this model and the benchmark model is realized. It is concluded that options on stocks with either low volatility, low dividend yield, low ex-dividend to maturity ratio or that are deep in or out of the money are reasonably priced with the escrowed dividend model.

A comparative analysis of accounting-based valuation models

We empirically compare the reliability of the dividend (DIV) model, the residual income valuation (CT, GLS) model, and the abnormal earnings growth (OJ) model. We find that valuation estimates from the OJ model are generally more reliable than those from the other three models, because the residual income valuation model anchored by book value gets off to a poor start when compared with the OJ model led by capitalized next-year earnings. We adopt a 34-year sample covering from 1985 to 2013 to compare the reliability of valuation estimates via their means of absolute pricing errors (MAPE) and corresponding t statistics. We further use the switching regression of Barrios and Blanco to show that the average probability of OJ valuation estimates is greater in explaining stock prices than the DIV, CT, and GLS models. In addition, our finding that the OJ model yields more reliable estimates is robust to analysts-based and model-based earnings measures.

The optimal dividend barrier in the Gamma-Omega model

In the traditional actuarial risk model, if the surplus is negative, the company is ruined and has to go out of business. In this paper we distinguish between ruin (negative surplus) and bankruptcy (going out of business), where the probability of bankruptcy is a function of the level of negative surplus. The idea for this notion of bankruptcy comes from the observation that in some industries, companies can continue doing business even though they are technically ruined. Assuming that dividends can only be paid with a certain probability at each point of time, we derive closed-form formulas for the expected discounted dividends until bankruptcy under a barrier strategy. Subsequently, the optimal barrier is determined, and several explicit identities for the optimal value are found. The surplus process of the company is modeled by a Wiener process (Brownian motion).

Testando o "dividend discountend model" com ações brasileiras

Este trabalho avalia a hipótese do Dividend Discounted Model ou Present Value Model, este modelo estabelece que o preço das ações é dado pelos dividendos futuros esperados antecipados por uma taxa apropriada de desconto. Utilizando dados de preços e dividendos de ações brasileiras, para os bancos Bradesco e Itaú, e a metodologia de vetores auto-regressivos, VAR, testamos se este modelo é respaldado empiricamente pelo comportamento dessas ações isoladamente. Como resultado geral temos uma aceitação de alguns aspectos não muito cruciais do modelo e uma forte rejeição da hipótese de que os dividendos sejam o fundamento do preço dessas ações, o que contradiz trabalhos anteriores realizados com a mesma metodologia para índices de ações.

Nonlinear mixture autoregressive model: economic applications

The aim of this dissertation is to model economic variables by a mixture autoregressive (MAR) model. The MAR model is a generalization of linear autoregressive (AR) model. The MAR -model consists of K linear autoregressive components. At any given point of time one of these autoregressive components is randomly selected to generate a new observation for the time series. The mixture probability can be constant over time or a direct function of a some observable variable. Many economic time series contain properties which cannot be described by linear and stationary time series models. A nonlinear autoregressive model such as MAR model can a plausible alternative in the case of these time series. In this dissertation the MAR model is used to model stock market bubbles and a relationship between inflation and the interest rate. In the case of the inflation rate we arrived at the MAR model where inflation process is less mean reverting in the case of high inflation than in the case of normal inflation. The interest rate move one-for-one with expected inflation. We use the data from the Livingston survey as a proxy for inflation expectations. We have found that survey inflation expectations are not perfectly rational. According to our results information stickiness play an important role in the expectation formation. We also found that survey participants have a tendency to underestimate inflation. A MAR model has also used to model stock market bubbles and crashes. This model has two regimes: the bubble regime and the error correction regime. In the error correction regime price depends on a fundamental factor, the price-dividend ratio, and in the bubble regime, price is independent of fundamentals. In this model a stock market crash is usually caused by a regime switch from a bubble regime to an error-correction regime. According to our empirical results bubbles are related to a low inflation. Our model also imply that bubbles have influences investment return distribution in both short and long run.

Another Look to the Price-Dividend Ratio: A Markov-Switching Approach

This paper analyzes the stationarity of this ratio in the context of a Markov-switching model à la Hamilton (1989) where an asymmetric speed of adjustment is introduced. This particular specification robustly supports a nonlinear reversion process and identifies two relevant episodes: the post-war period from the mid-50’s to the mid-70’s and the so called “90’s boom” period. A three-regime Markov-switching model displays the best regime identification and reveals that only the first part of the 90’s boom (1985-1995) and the post-war period are near-nonstationary states. Interestingly, the last part of the 90’s boom (1996-2000), characterized by a growing price-dividend ratio, is entirely attributed to a regime featuring a highly reverting process.

An Alternative View of the US Price-Dividend Ratio Dynamics

As a necessary condition for the validity of the present value model, the price-dividend ratio must be stationary. However, significant market episodes seem to provide evidence of prices significantly drifting apart from dividends while other episodes show prices anchoring back to dividends. This paper investigates the stationarity of this ratio in the context of a Markov- switching model à la Hamilton (1989) where an asymmetric speed of adjustment towards a unique attractor is introduced. A three-regime model displays the best regime identification and reveals that the first part of the 90’s boom (1985-1995) and the post-war period are characterized by a stationary state featuring a slow reverting process to a relatively high attractor. Interestingly, the latter part of the 90’s boom (1996-2000), characterized by a growing price-dividend ratio, is entirely attributed to a stationary regime featuring a highly reverting process to the attractor. Finally, the post-Lehman Brothers episode of the subprime crisis can be classified into a temporary nonstationary regime.

Environmental taxes and the Double dividend hypothesis

In this End of Degree Dissertation I built a basic economic model, where two perfectly competitive markets interact, as a tool to understand, illustrate and evaluate environmentalfiscal reforms that have already been implemented or have been announced in many developed countries. Thus, in this dissertation I try to explain as simply as possible the theorical aspects of the “double dividend” hyphotesis and provide a numerical example with illustrative purpose.

The role of payout ratio in the relationship between stock returns and dividend yield

ap Gwilym, Owain, McManus, Ian, and Thomas, Stephen, 'The role of payout ratio in the relationship between stock returns and dividend yield', Journal of Business Finance & Accounting (2004) 31(9-10) pp.1355-1387 RAE2008

Does the Fed Model travel well?

ap Gwilym, Owain, et al., 'Does the Fed Model travel well?', Journal of Portfolio Management (2006) 33(1) pp.68-75 RAE2008

Randomized observation periods for the compound Poisson risk model: Dividends

In the framework of the classical compound Poisson process in collective risk theory, we study a modification of the horizontal dividend barrier strategy by introducing random observation times at which dividends can be paid and ruin can be observed. This model contains both the continuous-time and the discrete-time risk model as a limit and represents a certain type of bridge between them which still enables the explicit calculation of moments of total discounted dividend payments until ruin. Numerical illustrations for several sets of parameters are given and the effect of random observation times on the performance of the dividend strategy is studied.

Optimal dividend strategies for a compound Poisson risk process under transaction costs and power utility

We characterize the value function of maximizing the total discounted utility of dividend payments for a compound Poisson insurance risk model when strictly positive transaction costs are included, leading to an impulse control problem. We illustrate that well known simple strategies can be optimal in the case of exponential claim amounts. Finally we develop a numerical procedure to deal with general claim amount distributions.

Dividend policy choice : do earnings or investment opportunities matter?

The aim of this paper is to analyse the influence of a company's level of earnings and growth opportunities in determining the dividend policy choice of Malaysian-listed firms. The analysis is based on a sample of 136 firms listed on the Bursa Malaysia Index over a period of six years, from 1990 to 1996. The evidence suggests that the payers are more profitable than non-payers. Likewise, investment opportunity, which is measured by (∂At /At-1) and (Vt /At), differed for both payers and non-payers. The regression estimates from Logit model suggest that the average coefficient for EATA is a significant determinant for firm's dividend policy choice in Malaysia. This is consistent with the supposition that profitable firms are more likely to pay dividends than less profitable firms. Although investment opportunities, the firm's size and leverage were not found to be statistically significant, they provided some explanation for the dividend policy choice.

Forecasting multivariate time series under present-value-model short- and long-run co-movement restrictions

It is well known that cointegration between the level of two variables (e.g. prices and dividends) is a necessary condition to assess the empirical validity of a present-value model (PVM) linking them. The work on cointegration,namelyon long-run co-movements, has been so prevalent that it is often over-looked that another necessary condition for the PVM to hold is that the forecast error entailed by the model is orthogonal to the past. This amounts to investigate whether short-run co-movememts steming from common cyclical feature restrictions are also present in such a system. In this paper we test for the presence of such co-movement on long- and short-term interest rates and on price and dividend for the U.S. economy. We focuss on the potential improvement in forecasting accuracies when imposing those two types of restrictions coming from economic theory.