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Abstract:
We construct a gold valuation theory based on viewing gold as a global real store of wealth. We show that the real price of gold varies inversely to the stock market P/E and thus is a direct function of a global yield required to achieve a constant real after-tax return equal to long-term global real GDP per-capita growth. We introduce a new exchange rate parity rule based on the equalization of inverse stock market P/Es (required yields) across nations. Foreign exchange affects the price of gold to the extent that required yields and Purchasing Power Parity equalizations do not take place across nations in the short run. A quarterly valuation model is constructed using concurrent economic data that is within 12% mean percentage tracking error from real U.S. gold prices from 1979- 2002. Several major world events have had a large but fleeting impact on gold prices.

Gold Price, Stock Market, Required yield, Forward Earnings yield, Foreign Exchange, P/E, Price-Earnings Ratio.

Abstract:
We find that the long-term equity premium is consistent with both GDP growth and portfolio insurance. We use a supply-side growth model and demonstrate that the arithmetic average stock market return and the returns on corporate assets and debt depend on GDP per capita growth. The implied equity premium matches the U.S. historical average over 1926-2001. Separately, we find that the equity premium tracks the value of a put option on the S&P 500. Our theory predicts a smaller equity premium in the future, assuming that the recent regime shifts in dividend policies, interest rates, and tax rates are permanent.

Abstract:
We find that the long-term equity premium is consistent with both GDP growth and portfolio insurance. We use a supply-side growth model and demonstrate that the arithmetic average stock market return and the returns on corporate assets and debt depend on GDP per capita growth. The implied equity premium matches the U.S. historical average over 1926-2001. Separately, we find that the equity premium tracks the value of a put option on the S&P 500. Our theory predicts a smaller equity premium in the future, assuming the recent regime shifts in dividend policies, interest rates, and tax rates are permanent.

Equity Premium, GDP Growth, T-Bills, Downside Risk, Portfolio Insurance

Abstract:
The long-term equity premium value is found to both be consistent with historic gross domestic product (GDP) growth and portfolio insurance against downside risk. First, we use a supply-side growth model and demonstrate that the arithmetic average stock market return and the returns on corporate assets and debt all depend on GDP/capita growth. The implied equity premium matches the U.S. historical average over 1926-2001. Alternately, an option-based approach shows that the equity premium is closely approximated by the premium of a put option for insuring a $1 real investment in the stock market against downside risk on a year-to-year basis. A smaller equity premium is predicted by our theory, assuming the recent regime shifts in dividend policies, interest rates, and tax rates are permanent.

Equity Premium, GDP Growth, Corporate Debt, T-Bills, Risk-Free Rate, Downside Risk, Options, Protective Puts, Portfolio Insurance, Total Stock Return

Abstract:
We develop a valuation formula for analyzing high growth firms using the stages of an industry lifecycle. Our model is best suited for start-up firms with low (or negative) earnings and low sales. Our formula uses start-up firm data and captures the firm's growth potential by incorporating data about two key stages along the lifecycle. One stage corresponds to the largest firm in the industry and the other to the firm situated at the inflection point of the S-shaped curve describing the lifecycle. We test the formula by examining the biotechnology industry in the late 1990s. An empirical analysis of the biotechnology industry reveals an important correlation between market values growth rates and assets growth rates, which is predicted by our formula. We find that on average, our formula underestimates the actual market value of biotechnology start-up firms by about 15%.

Valuation, High Tech Stocks, Industry Lifecycle

Abstract:
We develop a vertical differentiation game-theoretic model that addresses the issue of designing free software samples (shareware) for attaining follow-on sales. When shareware can be reinstalled, cannibalization of sales of the commercial product may ensue. We analyze the optimal design of free software according to two characteristics: the evaluation period allotted for sampling (potentially renewable) and the proportion of features included in the sample. We introduce a new software classification scheme based on the characteristics of the sample that aid consumer learning. We find that the optimal combination of features and trial time greatly depends on the category of software within the classification scheme. Under alternative learning scenarios, we show that the monopolist may be better off not suppressing potential shareware reinstallation.

Vertical differentiation, monopolist, free sample, software, durable goods, sales cannibalization, optimal design

Abstract:
We investigate the differences in the holdings of institutional investors relative to individual investors during an eight-month period between March and November 2000, where the Nasdaq Composite index fell 46.23% in value. We find evidence that during that market decline, institutional investors held stocks with less return volatility than individual investors. Our evidence of institutional investor preference for holding lower volatility stocks in a declining market may indicate their relatively greater sensitivity to downside risk. As a consequence, institutional investors are found to perform better than individual investors during that specific time period.

Abstract:
Stock market valuation and Treasury yield determination are consistent with the Fisher effect (1896) as generalized by Darby (1975) and Feldstein (1976). The U.S. stock market (S&P 500) is priced to yield ex-ante a real after-tax return directly related to real long-term GDP/capita growth (the required yield). Elements of our theory show that: (1) real after-tax Treasury and S&P 500 forward earnings yields are stationary processes around positive means; (2) the stock market is indeed priced as the present value of expected dividends with the proviso that investors are expecting fast mean reversion of the S&P 500 nominal growth opportunities to zero. Moreover, (3) the equity premium is mostly due to business cycle risk and is a direct function of below trend expected productivity, where productivity is measured by the growth in book value of S&P 500 equity per-share. Inflation and fear-based risk premia only have a secondary impact on the premium. The premium is always positive or zero with respect to long-term Treasuries. It may be negative for short-term Treasuries when short-term productivity outpaces medium and long run trends. Consequently: (4) Treasury yields are mostly determined in reference to the required yield and the business cycle risk premium; (5) the yield spread is largely explained by the differential of long-term book value per share growth vs. near term growth, with possible yield curve inversions. Finally, (6) the Fed model is partially validated since both the S&P 500 forward earnings yield and the ten-year Treasury yield are determined by a common factor: the required yield.

Abstract:
Stock market valuation and Treasury yield determination are consistent with the Fisher effect (1896) as generalized by Darby (1975) and Feldstein (1976). The U.S. stock market (S&P 500) is priced to yield ex-ante a real after-tax return directly related to real long-term GDP/capita growth (the required yield). Elements of our theory show that: 1) real after-tax Treasury and S&P 500 forward earnings yields are stationary processes around positive means; 2) the stock market is indeed priced as the present value of expected dividends with the proviso that investors are expecting fast mean reversion of the S&P 500 nominal growth opportunities to zero. Moreover, 3) the equity premium is mostly due to business cycle risk and is a direct function of below trend expected productivity, where productivity is measured by the growth in book value of S&P 500 equity per-share. Inflation and fear-based risk premia only have a secondary impact on the premium. The premium is always positive or zero with respect to long-term Treasuries. It may be negative for short-term Treasuries when short-term productivity outpaces medium and long run trends. Consequently: 4) Treasury yields are mostly determined in reference to the required yield and the business cycle risk premium; 5) the yield spread is largely explained by the differential of long-term book value per share growth vs. near term growth, with possible yield curve inversions. Finally, 7) the Fed model is partially validated since both the S&P 500 forward earnings yield and the ten-year Treasury yield are determined by a common factor: the required yield.

Required yield, Earnings yield, Equity Premium, S&P 500 Valuation, Fed Model