Time horizon role consideration in assets “prudent” and “cap” extremes estimation of stochastically evolving value

Анотація

Paper is focused on analysis and assessment of time horizon or project duration role in property upper or “cap” and lower or “prudent” value estimation. Based on stochastic modelling of market value evolution over time with its roots in Samuelson’s Rational Theory of Warrant Pricing methodology of assessing the role of project duration on these value extremes is proposed. Results of model testing provided using Ukrainian and British residential property market data bases demonstrated its soundness and general efficiency. Summarized results for different residential property types including houses, apartments and land plots in this respect are presented. In response to new international banking regulations set by Basel 3.1 Accord and implemented recently in requirements of European Regulation CRR3 generalized model for estimation of property “cap” and “prudent” value is described. The model presented in multi-factor regression type equations for estimation of adjustment parameters to be applied to property market value stochastically evolving over time for adequate estimation either “cap” or “prudent” value. Main parameters included into the model account for market general tendency, its volatility level, time horizon needed and level of confidence required. Generalized form of the model presented opens an opportunity of its broader implementation for other markets and types of assets.

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