Transactional Asset Pricing Approach
In the valuation theory department of economics, the Transactional Asset Pricing Approach (TAPA) is a general reconstruction of asset pricing theory developed in 2000s by a collaboration of Russian and Israeli economists Vladimir B. Michaletz and Andrey I. Artemenkov.[1] It provides a basis for reconstructing the discounted cash flow (DCF) analysis and the resulting income capitalization techniques, such as the Gordon growth formula (see dividend discount model ), from a transactional perspective relying, in the process, on a formulated dynamic principle of transactional equity-in-exchange.
General overview[edit]
TAPA approach originates with the framing of the dynamic inter-temporal principle of transactional equity-in-exchange for buyers and sellers in an asset transaction, the essence of which is that by the end of the analysis projection period neither party should be a losing side to the transaction, meaning that the capital of the buyer and the seller bound up in the transaction should be mutually equal at the end of Period . In TAPA, this dynamic valuation predicate forms an underlying new basis for justifying DCF analyses distinct, on the one hand, from the specific-individual-investor DCF premise developed by the American Economist Irving Fisher in his Theory of Interest 1930 book[2] and the perfect-competitive-market-approach to justifying DCF, developed by Merton Miller and Franco Modigliani in their seminal Dividend policy and growth Paper,[3] on the other hand.
Since the Transactional approach to asset valuation, whose genesis can be traced back to Book V of Nicomachean Ethics,[4] implies a distinct accounting for economic interests of both parties to a transaction with an economic asset, the buyer and the seller, it proceeds from developing a dual rate asset pricing model, which is complemented by a deductive-style multi-period discount rate derivation theory, originating as a generalization of the single-period discount rate framework of Burr-Williams, where the single-period discount rate, r, is conceptualized as being constituted of the current income component and the capital value appreciation component for a single asset or a portfolio aggregate: . The multi-period discount rate evaluation theory within TAPA, on the other hand, is a portfolio-level theory, in that it applies to an investment aggregate. A general formula for evaluating discount rates/rates of return at a portfolio-level in TAPA looks as follows[5]
Unlike single-period CAPM, TAPA is an explicit multi-period framework for forecasting market (or specific portfolio) rates of return.[6]
The TAPA theory lists conditions under which the developed dual-rate general asset pricing model reduces to the conventional single-rate Discounted cash flow (DCF) analyses framework. Such a framework with time-variable discount rates is called the TAPA BPE (Basic Pricing Equation):
The TAPA theory provides original derivations and conditions under which such BPE can be further reduced to most of the known income capitalization formats within the valuation theory, such as the direct income capitalization format (DIC), The Gordon Growth Model, the Inwood and Hoskald capitalization formats. One novel income capitalization format obtainable from the TAPA BPE is known as the "Quick capitalization model"[8]
Dual-rate asset pricing model in TAPA[edit]
Dual-rate asset pricing model developed under TAPA represents a substantial contribution of TAPA to generalizing the Discounted cash flow analysis framework. The General pricing equation for this model is as follows:[5]
The dynamic principle of equity-in-exchange mentioned above implies ; this principle is needed to reduce the dual-rate pricing model to more conventional-looking DCF analyses and TAPA BPE shown above, along with the assumption that , i.e. that the buyer's and seller's rates of return converge to some representative market value for such rates,, called "the discount rate" in the conventional single-rate DCF applications; as mentioned, TAPA's multi-period discount rate evaluation framework summarized in the formula above allows to determine such converged market rates on a valuation benchmark (portfolio) level.
Applications[edit]
TAPA valuation framework is applicable to pricing assets possessing less than perfect liquidity with reference to a selected valuation benchmark for which the discount rates have to be developed, or forecast, by a valuer. In particular, the TAPA approach has found applications for pricing assets to the Equitable/Fair standard of value (valuation basis), which is defined in the International Valuation Standards published by the International Valuation Standards Council.[9] Additionally, the flexible time-variable nature of discount rates in the TAPA BPE provides a novel framework for exploring the effects of market cycles on the prices of assets embedded in the markets
Further reading[edit]
- Michaletz, V. and Artemenkov, A.I. (2019), "The transactional asset pricing approach: Its general framework and applications for property markets", Journal of Property Investment & Finance, Vol. 37 No. 3, pp. 255–288. [1], [2]
- Michaletz V. Artemenkov I., Medevedeva O. "THE TRANSACTIONAL ASSET PRICING APPROACH (TAPA): APPLICATIONS OF A NEW FRAMEWORK FOR VALUING ILLIQUID INCOME-PRODUCING ASSETS IN THE PROFESSIONAL VALUATION CONTEXT", in the European Journal of Natural History, #5, 2019 pp. 31–36, [3]
References[edit]
- ^ A first publication on TAPA was authored by V. Michaletz in 2005: V. B. Michaletz (2005). "Encore on discount rates in appraisal and the income approach methods", in Voprosi Ocenki Quarterly #1, 2005 (published by the Russian Society of Appraisers (in Russian) http://sroroo.ru/upload/iblock/059/vo1_05.pdf
- ^ "Online Library of Liberty".
- ^ https://www2.bc.edu/thomas-chemmanur/phdfincorp/MF891%20papers/MM%20dividend.pdf[dead link] [bare URL PDF]
- ^ V.V. Galasyuk. Determination of the Fair value of object in sales, donation and barter transactions, Art Press, Dnepro 2016, pp.278 https://galasyuk.com/wp-content/uploads/2019/11/2019-06-21-pp1-208_Ru_DEMO.pdf
- ^ a b c Michaletz, Vladimir; Artemenkov, Andrey I. (2019-01-01). "The transactional asset pricing approach: Its general framework and applications for property markets". Journal of Property Investment & Finance. 37 (3): 255–288. doi:10.1108/JPIF-10-2018-0078. ISSN 1463-578X. S2CID 159143650.
- ^ Michaletz, Vladimir B.; Artemenkov, Andrey (2018-03-01). "The Transactional Assets Pricing Approach and Income Capitalization Models in Professional Valuation: Towards a "Quick" Income Capitalization Format". Real Estate Management and Valuation. 26 (1): 89–107. doi:10.2478/remav-2018-0008. S2CID 73613188.
- ^ in some applications of TAPA the subject asset can be a part of the benchmark portfolio, giving rise to some interesting circularity properties in the model, and suggesting macro-economic and counter-cyclical valuation applications for TAPA, e.g. see Маградзе А.Г "ТРАНЗАКЦИОННЫЙ ПОДХОД ЦЕНООБРАЗОВАНИЯ (TAPA) КАК ИНСТРУМЕНТ АНАЛИЗА ФУНДАМЕНТАЛЬНЫХ СТОИМОСТЕЙ? in Voproci Ocenki #2, 2019 (in Russian) https://www.elibrary.ru/item.asp?id=38548460
- ^ Michaletz, Vladimir B.; Artemenkov, Andrey (2018). "The Transactional Assets Pricing Approach and Income Capitalization Models in Professional Valuation: Towards a "Quick" Income Capitalization Format". Real Estate Management and Valuation. 26: 89–107. doi:10.2478/remav-2018-0008.
- ^ Artemenkov, Andrey I.; Lodh, Suman; Nandy, Monomita (2018). "Fair value in the professional valuation: concept and models". International Journal of Critical Accounting. 10 (6): 427. doi:10.1504/IJCA.2018.098262. ISSN 1757-9848. S2CID 217428099.