The Department of Finance and Risk Engineering welcomes Liuren Wu, Distinguished Professor of Finance, Baruch College to the BQE Lecture Series.
A Factor Model of Company Valuation
Accurate company valuation is the starting point of value investing and corporate decisions. This paper proposes a statistical factor model to generate company valuation across a large universe. The model scales the market value of a company by its book capital to generate a cross-sectionally comparable relative value target and constructs valuation factors by combining several descriptors from a similar category to increase coverage and reduce multicollinearity. Company relative value is mapped to industry classification and the valuation factors via a cross-sectional regression at each date. Historical analysis of U.S. publicly traded companies shows that the factor model explains a large proportion of the cross-sectional variation of company relative value and experiences little out-of-sample degeneration. The regression residual represents temporary company misvaluation, and can be exploited by both outside investors as attractive investment opportunities and internal management for market timing of corporate decisions.
Professor Liuren Wu is the Wollman Distinguished Professor of Finance at Zicklin School of Business, Baruch College, City University of New York. Professor Wu's research interests include option pricing, credit risk, and term structure modeling, market microstructure, and general asset pricing. Professor Wu has published over 50 articles, many of them in top finance journals such as the Journal of Finance, the Journal of Financial Economics, Review of Financial Studies, the Journal of Financial and Quantitative Analysis, Management Science, and Journal of Monetary Economics. Wu has worked extensively as a consultant in the finance industry, including data vendors, investment banks, and several fixed incomes, equity, and equity options hedge funds and market-making firms. As a consultant, he has developed statistical arbitrage strategies, risk management procedures, optimal trade execution and market-making strategies, and quantitative models for pricing fixed income and equity derivative securities.