Publications by Author: Fruehwirth, Manfred

Fruehwirth, Manfred, and Leopold Sögner. 2012. “Does the Sun Shine Really Shine on the Financial Markets?”. Abstract

After a series of papers has provided—partially ambiguous—results on the impact of weather variables on stock (index) returns, this article studies the impact of weather on a wide variety of financial market instruments, namely "risk-free" interest rates, the US corporate bond market, stock returns, stock index returns and the VIX volatility index. First, we construct a model that combines asset pricing and results from psychology to show how weather variables can affect asset prices in different market segments via mood. Second, in our empirical analysis we use several weather variables from the National Climatic Data Center (NCDC) and control variables motivated by economic theory. Applying various econometric techniques and using different market segments (motivated by differences in the risk level and institutional differences) allows to give a more detailed picture on the impact of weather on financial market prices. We demonstrate that on none of the market segments analyzed the weather has any significant impact.

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In the last two decades several European countries implemented tax systems that allow for the deduction of imputed equity interest from a company?s tax base. This paper integrates the tax benefits resulting from imputed interest on the stock of equity into business valuation. Three alternative discounted cash flow valuation methods are used to this end: the equity method, the Adjusted Present Value (APV) method, and the entity method. Intertemporal differences in risk require the use of various risk–adjusted discount rates in the equity method as well as the APV method. Using the equity method we show that the well–known, market–to–book ratio of the constant growth dividend discount model also holds in our model. When applying the APV method with imputed equity interest, an adjustment is necessary for each business, also for an unlevered company, to account for the tax shield resulting from equity financing. A closed–form solution is presented for the value of this tax benefit. We furthermore derive the weighted average cost of capital (WACC) under imputed interest on the stock of equity and the adjustment of the cost of equity that is necessary to derive the WACC as a weighted average of cost of equity and debt.


WCFIA Working Paper 06–02, February 2006