Systematic Mispricing in European Equity Prices?
IWH Discussion Papers,
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.
Repercusiones de la integración y consolidación de los sectores bancarios europeos sobre la innovación y las actividades de los emprendedores
Papeles de Economía Española,
En este artículo se analiza si el programa de intensificación de la integración del sector financier europeo puede dañar a la innovación y al crecimiento en Europa. En particular, es preciso resaltar los problemas que dicha integración financiera puede ocasionar sobre los últimos avances en materia de desarrollo empresarial. La integración financiera, al intensificar la competencia y la consolidación del sector bancario europeo, podría poner en peligro la financiación procedente de las fuentes más innovadoras. Sin embargo, al sopesar los datos actuales, la conclusión es que estos problemas serían, a lo sumo, transitorios.
Excess Volatility in European Equity Style Indices - New Evidence
IWH Discussion Papers,
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.
Are European Equity Style Indexes Mean Reverting? Testing the Validity of the Efficient Market Hypothesis
IWH Discussion Papers,
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.