READING 18: Capital Market Expectations Outline
A- Organizing the Task: Framework and Challenges 1- A Framework for Developing Capital Market Expectations 2- Challenges in forecasting a. Limitations of Economic Data b. Data Measurement Errors and Biases c. The Limitations of Historical estimates d. Ex Post Risk Can Be a Biased Measure of Ex Ante Risk e. Biases in Analysts Methods f. The failure to account for Conditioning Information g. Misinterpretation of Correlations h. Psychological Traps i. Model Uncertainty
B- Tools for Formulating Capital Market Expectations 1- Formal Tools a. Statistical Methods i. Historical Statistical Approach: Sample Estimators ii. Shrinkage Estimators iii. Time-Series Estimators iv. Multifactor Models b. Discounted Cash Flow Models i. Equity Markets ii. Fixed-Income Markets c. The Risk Premium Approach i. A General Expression ii. Fixed-Income Premiums iii. The Equity Risk Premium d. Financial Market Equilibrium Models 2- Survey and Panel Methods 3- Judgment
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C- Economic Analysis 1- Business Cycle Analysis a. The Inventory Cycle b. The Business Cycle c. Inflation and Deflation in the Business Cycle d. Market Expectations and the Business Cycle e. Evaluating Factors that Affect the Business Cycle i. Taking the Pulse of Consumers ii. Taking the Pulse of Business iii. Monetary Policy iv. Fiscal Policy 2- Economic Growth trends a. Consumer Impacts: Consumption and Demand b. A Decomposition of GDP Growth and Its Use in Forecasting c. Government Structural Policies 3- Exogenous Shocks a. Oil Shocks b. Financial Crises 4- International Interactions a. Macroeconomic Linkages b. Interest Rate/Exchange Rate Linkages c. Emerging Markets i. Essential Differences between Emerging and Major Economies ii. Country Risk Analysis Techniques 5- Economic Forecasting a. Econometric Modeling b. Economic Indicators c. Checklist Approach d. Economic Forecasting Approaches: Summary of Strengths and Weaknesses 6- Using Economic Information in Forecasting Asset Class Returns a. Cash and Equivalents b. Nominal Default-Free Bonds c. Defaultable Debt d. Emerging Market Bonds e. Inflation-Indexed Bonds f. Common Shares i. Economic Factors Affecting Earnings ii. The P/E Ratio and the Business Cycle iii. Emerging Market Equities g. Real Estate h. Currencies i. Approaches to Forecasting Exchange Rates i. Purchasing Power Parity ii. Relative Economic Strength iii. Capital Flows iv. Savings–Investment Imbalances j.
Government Intervention
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