PT  - JOURNAL ARTICLE
AU  - Maggie Copeland
AU  - Thomas Copeland
AU  - Timothy Copeland
TI  - Revising Equity Valuation with Tail Risk
AID  - 10.3905/jpm.2017.43.4.100
DP  - 2017 Jul 31
TA  - The Journal of Portfolio Management
PG  - 100--111
VI  - 43
IP  - 4
4099  - https://pm-research.com/content/43/4/100.short
4100  - https://pm-research.com/content/43/4/100.full
AB  - When VIX—a market index of volatility—increases, a firm’s response is to defer growth of investment. Simultaneously, the expected time to ruin, E(T), shortens, causing the firm’s value to decline more than commonly used valuation models suggest. The authors derive the characteristics of E(T) and revise valuation models that assume cash flows are growing perpetuities. They find that “value trap,” high-growth stocks, and “irrational exuberance” can be explained by incorporating E(T) into the traditional valuation models. Their empirical results show that the sensitivities of the 49 industry portfolios to the change in VIX are all significantly negative and undiversifiable and could be proxies for E(T).TOPICS: Analysis of individual factors/risk premia, statistical methods, fundamental equity analysis