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A Comparables Approach To Measuring Cashflow-At-Risk For Non-Financial Firms

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  • Jeremy C. Stein
  • Stephen E. Usher
  • Daniel LaGattuta
  • Jeff Youngen
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    Abstract

    Cashflow-at-Risk (C-FaR) is an attempt to create an analogue to Value at Risk (VaR) that can be used by non-financial firms to quantify various kinds of risk exposures, including interest rate, exchange rate, and commodity price risks. There are two basic ways to attack this problem. One is from the "bottom up," which involves building a detailed model of all of a company's specific exposures. The C-Far approach presented here is a "top-down" method of comparables that looks directly at the ultimate item of interest-the companies' cashflows. The fundamental challenge facing the top-down strategy is that, for any one company, there is not enough data on its own cashflows to make precise statements about the likelihood of rare events. To get around this problem, the authors match a target company with a large set of comparable companies that are expected to have similar cashflow volatility. The comparables are chosen to be close to the target company on four dimensions: (1) market cap; (2) profitability; (3) industry risk; and (4) stock price volatility. 2001 Morgan Stanley.

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    Bibliographic Info

    Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

    Volume (Year): 13 (2001)
    Issue (Month): 4 ()
    Pages: 100-109

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    Handle: RePEc:bla:jacrfn:v:13:y:2001:i:4:p:100-109

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    Cited by:
    1. Friberg, Richard & Huse, Cristian, 2012. "How to use demand systems to evaluate risky projects, with an application to automobile production," MPRA Paper 48906, University Library of Munich, Germany.
    2. Mark Carey & Rene M. Stulz, 2005. "The Risks of Financial Institutions," NBER Working Papers 11442, National Bureau of Economic Research, Inc.
    3. Mark Carey & Rene M. Stulz, 2007. "Introduction to "The Risks of Financial Institutions"," NBER Chapters, in: The Risks of Financial Institutions, pages 1-26 National Bureau of Economic Research, Inc.
    4. Sanda, Gaute Egeland & Olsen, Eirik Tandberg & Fleten, Stein-Erik, 2013. "Selective hedging in hydro-based electricity companies," Energy Economics, Elsevier, vol. 40(C), pages 326-338.
    5. Baule, Rainer, 2014. "Allocation of risk capital on an internal market," European Journal of Operational Research, Elsevier, vol. 234(1), pages 186-196.

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