The Transactional Asset Pricing Approach (TAPA): A new framework for valuing illiquid-income producing assets.
Forthcoming, ANEVAR Valuation Journal
7 Pages Posted: 23 Mar 2019 Last revised: 7 Aug 2019
Date Written: October 31, 2018
Ever since A. Marshall brought about the neoclassical synthesis in Economics and I. Fisher developed theories of capital valuation and interest in the early part of 20th c,, valuation theory has not been static. A particular spurt of activity has been observed in the 1950-1960th when the theory of pricing financial assets has been elaborated starting from works by H. Markovitz W.Sharpe , J.Lintner, as well as Modigliani & Miller. All these works were exploring the brave new world of big financial data, the crunching which has suddenly become possible by then newly introduced computer technology, therefore, predicating a valuation theory on distributional statistical concepts of average returns and standard deviations, in the framework of the market efficiency assumption and the homogeneity of market participant expectations. This has allowed to frame the standard valuation toolkit of the Modern Portfolio theory (MPT) — which Financial and Business assets valuers (as well as sometimes even Property valuers!) subsequently borrowed for their practical work. After this process of borrowing from the MPT valuation thinking has become assimilated to the actual valuation practicesin 1980s and 1990s, the fact that the underlying pricing models perform poorly even in the context of efficient public capital markets is often overlooked, or the need to hedge the theory with the protective belt of untenable highly abstract assumptions arises.
The Transactional Asset Pricing Approach (TAPA) may offer a way out of this cul-de-sac in the development of valuation theory for the world of assets with less-than-perfect liquidity, i,e the majority of real assets participating in economic exchanges. This Paper provides a non-technical outline of the analytical vision underlying TAPA and summarizes major formulaic and theoretical findings obtainable under TAPA.
Keywords: Transactional Asset Pricing Approach (TAPA), Fair Value, valuation theory, DCF, Direct Income capitalization, Gordon model, Inwood, Hoskald, Ring, time-variant discount rates
JEL Classification: G12, D46
Suggested Citation: Suggested Citation