Predicting equity movements using structural models of debt pricing and statistical learning

Singh, Kiran Ryan (2019-04)

Thesis (MCom)--Stellenbosch University, 2019.

Thesis

ENGLISH SUMMARY : Valuation is not an interesting problem in corporate finance, it is the only problem. Price and value are assumed to be the same number in economic theories of equilibrium and perfect capital markets. The economic theories of equilibrium asset pricing offer very weak practical suggestions for stock price behaviour at the firm level. The fundamental approach to stock price investing operates on the basis that price and value are two separate quantities and the stock price is fully determined by its intrinsic value. In this research the option-theoretic approach to default modelling is amended to provide an alternate view of value. Structural models apply an option-theoretic approach inspired by Merton (1974) that uses equity market and financial statement data in order to determine default probabilities. Default probabilities obtainable from the reduced form class of models provides the basis for extending the Merton model to estimate the firms value from market observable credit spreads. The probability of default is then a known constant provided from the reduced form model. The Merton model is reformulated with equity or firm value being used as the subject of the formula. The re-appropriated Merton model then provides a unique estimate of the firm's value based on current market information. The expected return on equity is then estimated from market credit spreads using individual capital structure and traded equity information. In this research it was found that historic estimates of return are poor predictors of future return at the firm level. The structural models provide good forecasts of return in some instances although have many challenges in implementation. The use of statistical learning methods was found to greatly improve predictions of future equity return movements using both debt and equity predictor variables, including unique predictor variables constructed from the structural models of the firm.

AFRIKAANSE OPSOMMING : Waardering is nie ‘n interessante probleem in korporatiewe finansies nie, dit is die enigeste problem. Prys en waarde word gesien as dieselfde getal in ekonomiese teorieë rakende ewewig en perfekte kapitale markte. The ekonomiese teorieë rakende die ewewig van bate pryse, verskaf baie swak praktiese voorstelle vir die gedrag van aandeel pryse op besigheidsvlak. Die fundametele uitkyk rondom beleggings in die aandele mark is gebou op die fundament dat prys en waarde twee verskillende bedrae is en dat die aandeel prys ten volle bepaal word deur sy intrensieke waarde. In hierdie navorsing word die opsie-teoretiese benadering tot wanbetaling modellering aangepas om ‘n alternatiewe benadering vir waarde te kry. Gestruktureerde modelle gebruik ‘n opsie-teoretiese metode geïnspireer deur Merton (1974) wat gebruik maak van data wat bestaan uit ekwiteit en finansiële state om wanbetaling waarskynlikhede te bereken. Wanbetaling waarskynlikhede verkry van die verminderde klas van modelle, bied ‘n basis om die Merton model uit te brei om ‘n firma se waarde te voorspel vanaf markverwante krediet premies. Die waarskynlikheid van wanbetaling is dan ‘n konstante wat gekry word vanaf die verminderde model. Die Merton model word dan verander sodat die ekwiteit of firma se waarde gebruik word as die inset van die formule. Hierdie model gee dan ‘n unieke voorspelling van die firma se waarde gebasseer op huidige mark inligting. Die verwagte opbrengs op ekwiteit word dan bepaal deur die mark se krediet premies, gebasseer op individuele kapitaal strukture en ekwiteit informasie. In hierdie navorsing was dit gevind dat historiese skattings van opbrengs swak voorspellings van die toekomstige opbrengs op ‘n firma vlak is. Die gestruktureerde modelle bied goeie vooruiskattings van opbrengs in sekere gevalle, maar het baie probleme met implimentering. Deur gebruik te maak van statistiese metodes is dit gevind dat vooruitskattings van toekoms opbrengs drasties verbeter wanneer beide skuld en ekwiteit, asook unieke veranderlikes wat opgestel word deur gebruik te maak van die gestruktureerde modelle van die firma, gebruik word.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/105931
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