Endogenous Fluctuations and the Role of Monetary Policy

7KLVUHVHDUFKZDVVXSSRUWHGE\DJUDQWRIWKH6PLWK5LFKDUGVRQ)RXQGDWLRQWRWKH6WDQIRUG,QVWLWXWHIRU 3XEOLF3ROLF\5HVHDUFK6,(35:HWKDQN.HQQHWK-XGGIRUFRQVWDQWDGYLFHZKLFKZDVFUXFLDODWVHYHUDOSRLQWVLQ WKHGHYHORSPHQWRIWKLVZRUN:HDOVRWKDQNV3HWHU+DPPRQG)HOL[.XEOHUDQG&DUVWHQ1LHOVHQIRUPDQ\ LQVLJKWIXOFRQYHUVDWLRQVUHJDUGLQJWKHFRQWHQWDQGPHWKRGVRIWKLVSDSHUDQGWR$OEHUW&KXQDQG3H\URQ/DZIRU DVVLVWDQFHLQSUHSDULQJWKHGDWDLQ6HFWLRQ:HDUHSOHDVHGWRKRQRU1HG3KHOSVZKRVHZRUNKDVDQWLFLSDWHGVRPH RIWKHGHYHORSPHQWVLQWKLVSDSHU 

(QGRJHQRXV)OXFWXDWLRQVDQGWKH5ROHRI0RQHWDU\3ROLF\

 E\

0RUGHFDL.XU]6WDQIRUG8QLYHUVLW\

ZLWK

+HKXL-LQ6WDQIRUG8QLYHUVLW\DQG0DXUL]LR0RWROHVH&DWKROLF8QLYHUVLW\RI0LODQ

WKLVGUDIW6HSWHPEHU

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DE.XU] 6FKQHLGHU.XU]%HOWUDWWL.XU]0RWROHVH8VLQJWKHWKHRU\RI5DWLRQDO %HOLHI(TXLOLEULXPKHQFHIRUWK5%(VHH.XU]WKHVHSDSHUVLQWURGXFHGDQXQLILHG PRGHOZKLFKH[SODLQVVLPXOWDQHRXVO\DORQJOLVWRIILQDQFLDOSKHQRPHQDUHJDUGHGDV ³DQRPDOLHV´7KHPRGHO¶VNH\IHDWXUHLVWKHKHWHURJHQHLW\RIDJHQW¶VEHOLHIV$JHQWVPD\EH

 ³EXOOV´ZKRDUHUDWLRQDOEXWRSWLPLVWLFDERXWIXWXUHFDSLWDOJDLQVRU³EHDUV´ZKRDUHUDWLRQDOEXW SHVVLPLVWLFDERXWIXWXUHFDSLWDOJDLQV3KHQRPHQDVXFKDVWKH(TXLW\3UHPLXP3X]]OHDUHWKHQ H[SODLQHGE\WKHIDFWWKDWSHVVLPLVWLF³EHDUV´ZKRDLPWRDYRLGFDSLWDOORVVHVGULYHLQWHUHVWUDWHV ORZDQGWKHHTXLW\SUHPLXPKLJKIRUDXQLILHGWUHDWPHQWVHH.XU]DQG0RWROHVH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¶VFKDUDFWHULVWLFV 0DQ\RIWKHFRQWURYHUVLHVLQPRQHWDU\WKHRU\DULVHIURPWKHXVHRIPRGHOVXWLOL]LQJ GLIIHUHQWDVVXPSWLRQV)RUWKLVUHDVRQZHVWDUWE\H[SOLFLWO\UHYLHZLQJRXUDVVXPSWLRQVLQUHODWLRQ WRRWKHUFXUUHQWZRUNRQHFRQRPLFIOXFWXDWLRQVDQGPRQHWDU\HFRQRPLFV 2XU$VVXPSWLRQVLQ5HODWLRQWRWKH/LWHUDWXUH :HVWDUWZLWK5HDO%XVLQHVV&\FOH5%&PRGHOVZKLFKLQVLVWDOOHFRQRPLFIOXFWXDWLRQV DUHFDXVHGE\WHFKQRORJLFDOVKRFNVDQGKHQFHPRQHWDU\SKHQRPHQDGRQRWPDWWHU,WKDVEHHQ ZHOONQRZQWKDWDYHUDJHODERUSURGXFWLYLW\LVSURF\FOLFDODQGWKH6RORZUHVLGXDOKHDYLO\XVHGE\ 5%&LVDSRRUPHDVXUHRIWHFKQRORJLFDOVKRFNVDVLWGHSHQGVXSRQHQGRJHQRXVYDULDEOHVVXFKDV FDSDFLW\XWLOL]DWLRQHJ*UHHQZRRG+HUFRZLW]DQG+XIIPDQ%XUQVLGH(LFKHQEDXPDQG 5HEHORDQG%DVX&RPSXWDWLRQDOOLPLWDWLRQVSUHFOXGHXVIURPLQWURGXFLQJ HQGRJHQRXVFDSDFLW\XWLOL]DWLRQLQWKLVSDSHUEXWZHKRSHWRFRUUHFWIRUWKLVLQIXWXUHUHVHDUFK$V

,QDUHFHQWSDSHU&ROHDQG2KDQLDQDUJXHWKDWWKH*UHDW'HSUHVVLRQUHVXOWHGIURPDFXPXODWLYH QHJDWLYHWHFKQRORJLFDOVKRFNWRWKH86HFRQRP\GXULQJ:HFDQQRWVXSSRUWVXFKDFRQFOXVLRQ  IRUWKHVLJQDQGVL]HRISURGXFWLYLW\VKRFNVZHDJUHHZLWKWKHFULWLTXHRIPRVWZULWHUVHJ 6XPPHUVDQG(LFKHQEDXPWKDWH[RJHQRXVWHFKQRORJLFDOVKRFNVFRQVWLWXWHDVPDOO IUDFWLRQRIWKH6RORZUHVLGXDODQGQHJDWLYHWHFKQRORJLFDOVKRFNVFDQQRWEHMXVWLILHG 6LQFHDQ H[RJHQRXVSURFHVVRIQRQQHJDWLYHSURGXFWLYLW\VKRFNVZLWKVPDOOYDULDQFHFDQQRWH[SODLQWKH REVHUYHGGDWDDQDOWHUQDWLYHSURSDJDWLRQPHFKDQLVPLVQHHGHG([DPSOHVRIDWWHPSWVRIVXFK PRGHOVZLWKLQWKH5%&WUDGLWLRQLQFOXGH:HQDEDQG.LQJDQG5HEHOR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IRFXVHGLQWKHHDUO\ VWDJHVRQWKHHIIHFWVRILQIRUPDWLRQDOLPSHUIHFWLRQV/XFDV¶DUJXHGWKDWPRQH\KDVUHDO

 HIIHFWEHFDXVHSHRSOHFRQIXVHFKDQJHVLQWKHSULFHOHYHOIRUFKDQJHVLQUHODWLYHSULFHV )XUWKHUPRUHDOWKRXJKPDUNHWSDUWLFLSDQWVPD\KROG5DWLRQDO([SHFWDWLRQVWKH&HQWUDO%DQNFDQ VXUSULVHWKHPE\PDNLQJXQH[SHFWHGSROLF\FKDQJHVWKDWZLOOKDYHUHDOHIIHFW%\LPSOLFDWLRQ PRQHWDU\SROLF\KDVDUHDOHIIHFWZKHQLWLVXQDQWLFLSDWHGDOODQWLFLSDWHGDFWLRQVDUHQHXWUDOL]HGE\ LPPHGLDWHDGMXVWPHQWVRIWKHSULFHOHYHO(PSLULFDOHYLGHQFHKDVQRWVXSSRUWHGWKLVFRQFOXVLRQ VHHIRUH[DPSOH0LVKNLQ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 $QLQWHJUDWHGYLHZRIPRQHWDU\HTXLOLEULXPKDVEHHQGHYHORSHGE\WKH'\QDPLF1HZ .H\QHVLDQ7KHRU\'1.7KLVYLHZLVHUHFWHGRQWZREDVLFDVVXPSWLRQV7KHPDUNHW HFRQRP\FRQVLVWVRIPRQRSROLVWLFDOO\FRPSHWLWLYHILUPVWKDWDUHSULFHVHWWHUVDQGSULFHVDUH ³VWLFN\´GXHWRWKHH[LVWHQFHRIORQJWHUPFRQWUDFWVWKDWSUHYHQWILUPVIURPIUHHO\DGMXVWLQJSULFHV HJ7D\ORU&DOYR<XQ*RRGIULHQGDQG.LQJ&ODULGD*DOLDQG

 *HUWOHU5RWHPEHUJDQG:RRGIRUG:RRGIRUGDE,Q PDQ\SDSHUVDXWKRUVZRUNZLWK&DOYR¶VLGHDOL]DWLRQZKHUHDWDQ\GDWHRQO\DIUDFWLRQRI WKHILUPVDUH³DOORZHG´WRFKDQJHSULFHVZKLOHRWKHUVFDQQRW,QVXFKDQHFRQRP\IOXFWXDWLRQVRI RXWSXWDUHFDXVHGE\H[RJHQRXVVKRFNVEXWWKHLUHIIHFWVDUHIXUWKHUDPSOLILHGE\LQFRUUHFWSULFH VHWWLQJE\ILUPVDQGKHQFHWKHHFRQRP\LVQRWRSHUDWLQJHIILFLHQWO\&KDQJHVLQLQWHUHVWUDWHVDQG PRQH\VXSSO\KDYHUHDOHIIHFWVVLQFHQRWDOOILUPVFKDUJHWKHVDPHSULFHVRPHDUHDEOHWRDGMXVW SULFHVEXWRWKHUVDUHQRW³SHUPLWWHG´WRDOWHUSULFHVLQUHVSRQVHWRVKRFNVDQGPXVWSURGXFHRXWSXW XQGHUWKHZURQJSULFHV,QVXFKDQHFRQRP\WKHREMHFWRIPRQHWDU\SROLF\LVWRUHVWRUHHFRQRPLF HIILFLHQF\E\FRXQWHULQJWKHQHJDWLYHHIIHFWRISULFHULJLGLW\8QGHUDQRSWLPDOSROLF\WKHHIIHFWV RISULFHULJLGLW\ZRXOGEHHVVHQWLDOO\UHPRYHG ,QDQHIIRUWWREROVWHUWKH'1.WKHRU\UHVHDUFKIRFXVHGRQFUHGLWFRQVWUDLQWVDVDQDGGHG PHFKDQLVPRIYRODWLOLW\DPSOLILFDWLRQ7KHFHQWUDOLGHDLVWKDWWKHLPSHUIHFWLRQVLQWKHFUHGLW PDUNHWVDFWDVDQDPSOLILFDWLRQPHFKDQLVP7KHOLWHUDWXUHRQFUHGLWUDWLRQLQJLVH[WHQVLYHEXW WKHUHLVQRWHYHQDJUHHGXSRQGHILQLWLRQRIZKDWFRQVWLWXWHFUHGLWPDUNHWLPSHUIHFWLRQVHJVHH VXUYH\RI-DIIHDQG6WLJOLW]5HFHQWZRUNSURSRVHVWKDWDQLPSRUWDQWHIIHFWRIPRQHWDU\ SROLF\RSHUDWHVWKURXJKLWVLPSDFWRQWKHDYDLODELOLW\RIFUHGLWWRERUURZLQJILUPV.\RWDNLDQG 0RRUH%HUQDQNHDQG*HUWOHU%HUQDQNH*HUWOHUDQG*LOFKULVWDQG&DOVWURP DQG)XHUVWDUJXHWKDWIOXFWXDWLRQVLQWKHSULFHRIDVVHWVDOWHUVWKHFROODWHUDODYDLODEOHWR HQWUHSUHQHXUVZKRZLVKWRERUURZDQGLQYHVW$IDYRUDEOHWHFKQRORJLFDOVKRFNRUH[SDQVLRQDU\ PRQHWDU\SROLF\UHPRYHFUHGLWFRQVWUDLQWVDQGDOORZVHQWUHSUHQHXUVWRFDUU\RXWPRUH H[SDQVLRQDU\LQYHVWPHQWSROLFLHVZKLOHDQHJDWLYHH[RJHQRXVVKRFNRUWLJKWPRQHWDU\SROLF\DFWV LQWKHRSSRVLWHGLUHFWLRQ7KHPHFKDQLVPDWZRUNLVWKHFKDQJHLQWKHULVNSUHPLXPRIEDQNUXSWF\

1RWHWKDWXQGHUFRQGLWLRQVRIDV\PPHWULFDQG?RULQFRPSOHWHLQIRUPDWLRQHYHQWKHGHILQLWLRQRI3DUHWR RSWLPDOLW\LVQRWHQWLUHO\DJUHHGXSRQDQGLVWKXVDQRSHQUHVHDUFKTXHVWLRQ  ZKLFKUHVXOWVIURPYDULDWLRQVLQWKHOHYHORIWKHFROODWHUDODYDLODEOHWRERUURZHUV%HUQDQNH *HUWOHUDQG*LOFKULVWFDOOWKLVHIIHFWD³)LQDQFLDO$FFHOHUDWRU´ &UHGLWLVDQLPSRUWDQWFRPSRQHQWRIPRQHWDU\DQDO\VLVZKLFKVKRXOGEHLQFRUSRUDWHGLQ RXUPRGHO+RZHYHUWKH³)LQDQFLDO$FFHOHUDWRU´DERYHZDVGHYHORSHGXQGHUVWURQJDVVXPSWLRQV WKDWLHQWUHSUHQHXUVDUHULVNQHXWUDOLLWKHUDQGRPRXWFRPHVRIWKHLULQYHVWPHQWDFWLYLWLHVDUH QRWREVHUYDEOHE\WKHEDQNDQGLLL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YLHZRI PRQH\QHXWUDOLW\DQGWKHOLWHUDWXUHZKLFKKROGVWKDWPRQH\KDVDQHIIHFWRQO\ZKHQWKHPRQHWDU\ DXWKRULW\³VXUSULVHV´WKHSULYDWHVHFWRU,IDJHQWVDUHVXUSULVHGRU³FRQIXVHG´EHWZHHQPRQHWDU\ DQGUHDOVKRFNVWKHQLQVRPHVHQVHWKHDOORFDWLRQLQWKHHFRQRP\LVQRWHIILFLHQW +HQFHWKH UHDVRQZK\DUDWLRQDOFHQWUDOEDQNZRXOGZDQWWRVXUSULVHWKHSXEOLFLVEHFDXVHLWZRXOGZDQWWR FRUUHFWIRUODFNRI3DUHWRHIILFLHQF\+RZHYHULIODFNRI3DUHWRHIILFLHQF\LVDVVRFLDWHGZLWK F\FOLFDOIOXFWXDWLRQVPRQHWDU\SROLF\ZRXOGQRWEHXVHIXOVLQFHLWZLOOEHIXOO\DQWLFLSDWHGVHH

 /XFDV>@DQG6DUJHQWDQG:DOODFH>@7KHPRQHWDULVWYLHZLVWKXVLQWHUQDOO\FRQVLVWHQW LIPRQHWDU\SROLF\LVHIIHFWLYHLWVKRXOGEHXVHGWRFRUUHFWIRU3DUHWRLQHIILFLHQF\EXWVXFKSROLF\ FDQQRWDFFRPSOLVKFRXQWHUF\FOLFDOVWDELOL]DWLRQVLQFHLWZRXOGEHIXOO\DQWLFLSDWHG 0RVW2SWLPDO3ROLF\PRGHOVGRQRWDGGUHVVWKHTXHVWLRQRIZK\WKHFHQWUDOEDQNVKRXOG ZDQWWRIROORZDVWDELOL]DWLRQSROLF\7KH\DUHPRVWO\GHVFULEHGE\DUHGXFHGIRUPV\VWHPRI HTXDWLRQVLQFRUSRUDWLQJWKHRSWLPDOEHKDYLRURIWKHSULYDWHVHFWRUJLYHQWKHPRQHWDU\SROLF\LQ SODFHDQGDVVXPLQJD3KLOOLSVFXUYHDVDVWUXFWXUDOHTXDWLRQ7KH&HQWUDO%DQNWKHQVHOHFWV GLUHFWO\WKHRSWLPDOPL[RILQIODWLRQDQGJURZWKUDWHRI*13VRDVWRPLQLPL]HWKHIOXFWXDWLRQVLQ WKHHFRQRP\$VDPSOHRIFRQWULEXWLRQVDORQJWKLVOLQHLQFOXGH7D\ORUDQGSDSHUVLQ 7D\ORU¶V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

 VSHFLILFPRGHORISULFHVWLFNLQHVVWKLVREMHFWLYHLPSOLHVWKDWWKHFHQWUDOEDQNLVWRVWHHUQRPLQDO LQWHUHVWUDWHVDWHDFKGDWHVRWKDWWKHUHVXOWLQJUDWHRILQIODWLRQLVFORVHWRWKHRQHDQWLFLSDWHGE\ WKRVHDJHQWVIRUFHGWRIL[SULFHVLQWKHSUHYLRXVGDWH:HVKDOOSUHVHQWDQDOWHUQDWLYHYLHZ ,QWKHGHYHORSPHQWEHORZZHGRQRWVHHNWRFKDUDFWHUL]HRSWLPDOPRQHWDU\SROLF\DQG HPSOR\RQO\WKHWUDGLWLRQDO³SROLF\´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¶VYLHZRISDSHUPRQH\DQGILQDQFLDOPDUNHWV([SHFWDWLRQVDUH PHQWLRQHGRIWHQLQ.H\QHVDOWKRXJKKHQHYHUGHYHORSHGDIRUPDOWKHRU\RILQGLYLGXDO EHOLHIV0DUNHWH[SHFWDWLRQVDUHFHQWUDOWR³FXPXODWLYHPRYHPHQWV´LQ3LJRXVHH3LJRX¶V &KDSWHU9,DQGH[SHFWDWLRQVDUHEDVLFWRWKHSURFHVVRIGHYLDWLRQVIURPDVWDWLRQDU\HTXLOLEULXP LQWKH6ZHGLVKVFKRROHJVHH0\UGDO¶VYLHZRIPRQH\LQ0\UGDOFKDSWHU,,,$OVRWKH FRQFHSWRI³VXEMHFWLYHYDOXHV´EDVHGRQGLYHUVHH[SHFWDWLRQVLVDFRUQHUVWRQHRI/LQGDKO WKHRU\RIPRQH\DQGFDSLWDO)LQDOO\LQHYDOXDWLQJWKHLPSDFWRIUDWLRQDOH[SHFWDWLRQV)U\GPDQ DQG3KHOSVUHFRJQL]HWKHLPSRUWDQFHRIGLYHUVHEHOLHIVDQGVHHNDZD\WRIRUPXODWHPRGHOV

 ZLWKVXFKDIHDWXUH7KH\MXVWLI\WKHLUSRVLWLRQRQWKHJURXQGWKDWDQ\WKHRU\ZLWKXQLIRUPPDUNHW EHOLHIVRIDJHQWVLVIXQGDPHQWDOO\QRQUREXVWVD\LQJSDJH %XWRQFHWKHWKHRUHWLFDOGRRULVRSHQHGWRRQHRUPRUHK\SRWKHVHVRIRSWLPDOLW\LQWKHH[SHFWDWLRQV IRUPDWLRQRIWKHLQGLYLGXDODJHQWVWKHLPSOLHGEHKDYLRURIWKHRWKHUZLVHLGHQWLFDOPRGHOLVRIWHQIRXQGWR EHZUHQFKHGLQWRGLUHFWLRQVIDUIURPWKHEHKDYLRULPSOLHGE\WKHUDWLRQDOH[SHFWDWLRQVK\SRWKHVLV,QVKRUW 3DQGRUD¶VER[RIGLVHTXLOLEULXPEHKDYLRULVRSHQHGXS 7KHWKHRU\RI5DWLRQDO%HOLHIVSURYLGHVDQDQDO\WLFDOH[SUHVVLRQDQGDYRFDEXODU\IRUWKHVHLGHDV $OWKRXJKD5DWLRQDO%HOLHILVDJHQHUDOL]DWLRQRIWKHUDWLRQDOH[SHFWDWLRQVK\SRWKHVLV7KH5%( WKHRU\VKRZVWKDWLQGHHGDV)U\GPDQDQG3KHOSV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

3 3


' B

:  × T  T 

'

×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³SULFHOHYHO´DWW  WKHUDWHRILQIODWLRQDWW . UHDOFDSLWDOVWRFNHPSOR\HGLQWKHSURGXFWLRQRIFRQVXPHUJRRGVDWW QRPLQDOZDJHDWW QRPLQDOSULFHDWWRIDXQLWRIFDSLWDOJRRGVLQVWDOOHG WKHUHDOSULFHRIFDSLWDODWW / ODERULQSXWLQWKHSURGXFWLRQRIFRQVXPHUJRRGVDWW 1 LQSXWDWWLQXQLWVRIFRQVXPSWLRQJRRGVLQWRWKHSURGXFWLRQRIFDSLWDOJRRGV  UHDORXWSXWRIFRQVXPHUJRRGVDWW , UHDORXWSXWRIQHZFDSLWDOJRRGVSURGXFHGDWWE\WKHLQYHVWPHQWWHFKQRORJ\ 2XWSXWDQG3URGXFWLYLW\ 7KHUHLVDODUJHQXPEHURILGHQWLFDOFRPSHWLWLYHILUPVDQGDJJUHJDWHRXWSXWRIFRQVXPHU

<

_'

$

L

 .



>

/  

^

>

 W

'

  `

>

 

>

' L

 ^

L

   W

'

   ` ORJ

L



' 8

 ORJ

L



% D

  

D



-

_{1   }

_F

   LLG

L



'

 

8

 

F

 

8



'

 

F



'



F



F '

 

8



'

 

F



'

 .

_'



_{& *}

.


%

, N

_'

.

>

<

'

$

L



>

 / . 

>

/

'

$

L



>

 / N 

L

 / L

'

,

>

Z

'

: 

>

3 J

'

<

>

 JRRGVLVGHILQHGE\DVWDQGDUGSURGXFWLRQIXQFWLRQ  W\SLFDOO\ZLWK$  7KHSURGXFWLYLW\SURFHVV LVDGHWHUPLQLVWLFWUHQGSURFHVVVDWLVI\LQJ D  ZKLOHUDQGRPSURGXFWLYLW\ LVD0DUNRYSURFHVVRIWKHIRUP E 0RVWSURGXFWLYLW\VWXGLHVVHWWKHTXDUWHUO\PHDQUDWHRIWHFKQRORJLFDOFKDQJHVRWKDW DQGWKLVLVWKHYDOXHZHXVHLQDOORXUFRPSXWDWLRQV 7KHNH\SDUDPHWHUVIRUWKHWUDGLWLRQDO5%&OLWHUDWXUHDUH 7RUHSOLFDWHWKH86 TXDUWHUO\GDWDWKH\ZHUHVHWDW EXWHYLGHQFHVKRZVHQGRJHQRXVYDULDEOHV DFFRXQWIRUDVPXFKDVRIWKHVSHFLILHGYDOXHRIWKHYDULDQFHDQGKHQFH VKRXOGEHD IUDFWLRQRI7KHSUREOHPLVWKDWIRUORZHUYDOXHVRIWKLVSDUDPHWHUWKH5%&PRGHOIDLOVWR JHQHUDWHYRODWLOLW\VHH.LQJDQG5HEHOR>@)LJSDJH,QDFFRUGZLWKWKHHPSLULFDO HYLGHQFHWKHVHSDUDPHWHUVDUHVHWLQRXUPRGHODW  7KHDJJUHJDWHFDSLWDODFFXPXODWLRQHTXDWLRQLVDVXVXDO 

ZKHUH

*

LVWKHUDWHRIGHSUHFLDWLRQDQG, DUHQHZXQLWVRIFDSLWDOJRRGVSODFHGLQWRSURGXFWLRQDW

WLPHWLQSXWVRQZKLFKZRXOGKDYHEHHQH[SDQGHGDWWE\WKHLQYHVWPHQWJRRGVVHFWRU0RVW VWXGLHVVHW

*

 DQGWKLVLVWKHYDOXHXVHGLQRXUPRGHO1RZOHW DQGZHKDYH

 

J

'

<

>

'

$

L

/ N


L

 / N

_'



_{& *}

N


L



%

L T

_'

× T  3 Z 5 Z

_'

$

L



_{& F}

 N


L

 /
5

_'

$

L F

N


L

 /



& *

T   D  :HWKXVKDYH E  6LQFH LVWKHUHDOSULFHRIDXQLWRIFDSLWDOLQHTXLOLEULXPWKHUHDOZDJHUDWH DQGWKH UHQWDOUDWHRQFDSLWDO DUHGHILQHGE\WKHPDUJLQDOSURGXFWLYLW\FRQGLWLRQV D E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

n

2XWSXW

' 6



'

G 

%

G

&

G 

%

H

  2XWSXW  

' 6

 

'

V 

%

V

&

V 

%

H

  

n -

1  

F

 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¶VWZRDFWLYLWLHVPDNHLWPXFKHDVLHUWRXQGHUVWDQGERWKWKHUDWLRQDOLW\ FRQGLWLRQVRQWKHEHOLHIVRIWKHDJHQWVDQGWKHPHFKDQLVPSURSDJDWLQJYRODWLOLW\ 7KHWZR FRQVWDQWUHWXUQVWRVFDOHLQYHVWPHQWDFWLYLWLHVWUDQVIRUPFRQVXPHUJRRGVLQWRDUDQGRPQXPEHURI XQLWVRIFDSLWDOJRRGVGHSHQGLQJXSRQWKHUHDOL]HGVWDWH 7KHUDQGRPRXWSXWRIWKHWZR DFWLYLWLHVLVVSHFLILHGLQWKHIROORZLQJZD\ D7HFKQRORJ\,0,QSXWXQLWRIFRQVXPSWLRQJRRG E7HFKQRORJ\,,6,QSXWXQLWRIFRQVXPSWLRQJRRG ZKHUH LLG,QDQ\GLVFXVVLRQRIDQ5((DJHQWVZLOOEHDVVXPHGWRNQRZWKLV

n -

1  

F

 

n -

1  

F

  G

'

  G 

'

 V

'

  V 

'

 

P



'



n -

1  

F

 

n

 W

_'

     

n

  

F

 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
DVVXPSWLRQFRQVLGHUWKHFDVH  XVHGLQWKHPDLQ VLPXODWLRQVRIWKLVSDSHU,IDQDJHQWLQYHVWVXQLWZLWKSURSRUWLRQV,  , 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¶PRGHOVWREHVWDWLVWLFDOO\FRPSDWLEOHZLWKWKHVH +RZHYHUDWHDFKGDWHWKH\GRQRWEHOLHYHWKDWWKHPHDQYDOXHLV]HURKHQFHWKHLURSWLPDO LQYHVWPHQWSRUWIROLRZLOOYDU\GHSHQGLQJXSRQWKHLUEHOLHIV

&

R '



_&

/ .
 1 1  1

'

1

%

1  , T
0 0 0


' k

 1  1   , . 

'

.  

%

.   . ,

' 6

 1

% 6

  1 

n

L

1

'

1 

%

1    7KH,QILQLWHO\/LYHG$JHQWV :HILUVWLQWURGXFHWKHIROORZLQJQRWDWLRQIRUN  FRQVXPSWLRQRINDWW  OHLVXUHRINDWW . DPRXQWRIFDSLWDOVWRFNSXUFKDVHVE\NRQWKHRSHQPDUNHWDWW  DPRXQWRIFDSLWDORZQHGE\NDWWDQGXVHGLQSURGXFWLRQDWW LQSXWLQXQLWVRIFRQVXPSWLRQJRRGVRINLQLQYHVWPHQWVWHFKQRORJ\0DWW LQSXWLQXQLWVRIFRQVXPSWLRQJRRGVRINLQLQYHVWPHQWVWHFKQRORJ\6DWW WRWDOLQSXWRIDJHQWNLQLQYHVWPHQWVWHFKQRORJ\DWW WRWDORXWSXWRIQHZLQYHVWPHQWVLQXQLWVRIFDSLWDOJRRGVRINDWGDWHW % DPRXQWRIRQHSHULRGQRPLQDOELOOSXUFKDVHGE\DJHQWNDWW  WKHSULFHRIDRQHSHULRGELOODWW7KLVLVDGLVFRXQWSULFH DPRXQWRIPRQH\KHOGE\DJHQWNDWW UDQGRPJURZWKUDWHRIPRQH\VXSSO\ZKHQLWLVDSROLF\LQVWUXPHQW + KLVWRU\RIDOOREVHUYDEOHVXSWRW %HIRUHIRUPXODWLQJWKHDJHQWV¶RSWLPL]DWLRQZHQHHGWRFODULI\WKHLVVXHRIWLPLQJ$WGDWHWDJHQW NLQYHVWV DQGDWWKHVWDUWRIGDWHWWKHUDQGRPUHDOL]DWLRQWDNHVSODFHLQWKH LQYHVWPHQWJRRGVVHFWRUEHIRUHWKHUDWHRIWHFKQLFDOSURJUHVVLVUHDOL]HG7KHQHZFDSLWDO MRLQLQJSURGXFWLRQLVDGGHGWR WRIRUPWKHFDSLWDO XVHGLQSURGXFWLRQDWGDWH W7KLVLPSOLHV N ZKLFKLVVRPHZKDWRGGQRWDWLRQ7KLV RGGIHDWXUHLVXQDYRLGDEOHVLQFHZHFRPSUHVVLQWRRQHGDWHWZRUDQGRPUHDOL]DWLRQVILUVWRI DQGWKHQRI WKHUDWHRIWHFKQRORJLFDOSURJUHVV1RZGHQRWHE\ WKHLQSXWVLQWR

n

,


' 6

1


% 6

 1 
 ,  , 

'

T×   ,  


%

,  
   ZKLOH QRWLQJ WKDW ,


'

, 


%

, 
 <  < 

'

<

&

1

%

,  J 

'

< 

>

 J

'

<

>

J 

'

J

&

Q

%

L  0D[ (
>

j

  

$

  

_{& (}

 & 

R

   


%

 0 3  

_ + @  

$

  3 &

%

.  × T 

%

1

%

1  3

%

% T

&



&R

 ×:

&

.
  ×T



%

5 3 

&

%


%

0

&

0


k '

 ,


' 6

1


% 6

 1 
  1

$

  1 

$

_ .


'

.  


%

,
 .  .
 ,
 ,
 F

_'

&

>

T 

'

× T  3 E

_'

% 3

>

0 3

>

'

P 0 3

>

'

P 0
 3

>

'

P


B L

Q

_'

1

>

L

'

,

>

N

'

.

>

. 

'

. 

>

3  3

' B

   WKHLQYHVWPHQWVHFWRU2XWSXWRIQHZLQYHVWPHQWVDWGDWHWLVDIIHFWHGE\ DQGLVGHILQHGE\ N  :HWKXVGHILQH WKHYDOXHRIQHZLQYHVWPHQWVSODFHGLQWRSURGXFWLRQDWGDWHWWREH DQG*13GHQRWHG E\ 'HILQH DQGWKH LQFRPHLGHQWLW\EHFRPHV 1RZIRUDQ\SUREDELOLW\EHOLHI4 RIDJHQWNKLVSUREOHPLVWKHQWRPD[LPL]HWKHXWLOLW\  D VXEMHFWWRWKHEXGJHWFRQVWUDLQW E  F G  1RWHWKHGLVWLQFWLRQEHWZHHQFDSLWDO SXUFKDVHGDWWRQWKHRSHQPDUNHWDQG XVHGLQ SURGXFWLRQDWWDQGRZQHGE\WKHDJHQWDWWKDWWLPH$OVRWKHQRWDWLRQIRU VKRZVWKDWZH DVVXPHWKHLQSXWVLQWRLQYHVWPHQWVWDNHSODFHDWWWKHUHDOL]DWLRQRIDOOUDQGRPIDFWRUVLQWKH LQYHVWPHQWVHFWRUWDNHSODFHDWWKHVWDUWRIGDWHWDQGKHQFH LVWKHQXPEHURIQHZXQLWVRI FDSLWDOSURGXFHGDWWKHHQGRIWDQGSODFHGLQWRSURGXFWLRQDWWKHVWDUWRIGDWHW:HQRUPDOL]H WKHSUREOHPE\          8VLQJDEDQG WKH PD[LPL]DWLRQSUREOHPEHFRPHV

0D[ (

j

 

$

  

_{& (}

> F

>



R

   


%

 P

>

 

@  

$

  F

'



& R

 Z

%

N


L

 T 

%

5 

%

P


k %

E


L



B

&

N  T 

&

Q

%

Q  

&

E T

&

P L


' 6

Q


% 6

 Q  
  Q


$

  Q 


$

 N


'

N 


%

L
 F

'



.

R

_Z N  F  
  

R

     
 T  

' $

(   F   
  

R

       
 > T    

%

5    L 
 @ Q F  
  

R

     
 T  

' $

(   F   
  

R

       
 > T    

%

5    L 


6

 @ Q  F  
  

R

     
 T  

' $

(   F   
  

R

       
 > T    

%

5    L 


6

  @ E F  
 

R

    
 T  

' $

(   F  

L

  


R

    
  L 


B

   F 



R

   



&

P 


' $

(
> F 

L




R

  

 @

k

 

L

  

B

  D¶  VXEMHFWWR E¶  F¶  G¶  7RVLPSOLI\WKHVWDWHPHQWRIWKH(XOHUHTXDWLRQVZHLJQRUHFRQVWUDLQWVF¶DQGUHWXUQWRLWRQO\LQ $SSHQGL[%ZKHUHZHGLVFXVVWKHFRPSXWDWLRQDOLVVXHVUDLVHGE\WKHPRGHO+HQFHWKHILUVWRUGHU FRQGLWLRQVIRUODERUVXSSO\DUH D  1H[WWKHILUVWRUGHUFRQGLWLRQZLWKUHVSHFWFDSLWDOSXUFKDVHGRQWKHRSHQPDUNHW LV E  7KHRSWLPDOLW\FRQGLWLRQZLWKUHVSHFWWR LV F DQGWKHFRQGLWLRQZLWKUHVSHFWWR LV G  7KHILUVWRUGHUFRQGLWLRQZLWKUHVSHFWWR LV H  )LQDOO\WKHRSWLPXPZLWKUHVSHFWWRPRQH\KROGLQJVUHTXLUHV I   0RQHWDU\3ROLF\ 7KHPRQHWDU\SROLF\XVHGLQRXUPRGHOLVWKHIDPLOLDUPRQHWDU\LQMHFWLRQDFFRUGLQJWR



k



&

  0 0

k

 0 

L



n

  4   4   P

_'

k

B L

P 
 .


'

.  


%

. 
 .  

%

.  

'

.
 

& *

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EDE E¶DIDQGE\WKHIROORZLQJDGGLWLRQDOFRQGLWLRQV 0RQH\JURZWK7KHPRQH\VXSSO\VDWLVILHV D  0DUNHWFOHDULQJFRQGLWLRQV*LYHQWKHDFFRXQWLQJLQD¶G¶ZHDJJUHJDWHWRHVWDEOLVKWZR HTXDWLRQV2QHDFFRXQWLQJLGHQWLW\VSHFLI\LQJWKHDPRXQWRIFDSLWDOHPSOR\HGDWGDWHW  DQGDPDUNHWFOHDULQJFRQGLWLRQLQWKHPDUNHWIRULQVWDOOHGFDSLWDODWGDWHW 

.

_'

.
 

& *



%

,
 ,


'

, 


%

,  


' 6

 1 


%

1 
 

% 6

 1   


%

1  
  N 

%

N 

'

N L


' 6

Q


% 6

 Q  
  N

'

   N

_'

N
  

_{& *}



L



%

L
 N  

%

N  

'

N
  

& *



L

 E 

%

E 

'

  

& R

 

%

 

& R

 

'

/ P 

%

P 

'

P  7KHG\QDPLFVRIFDSLWDOHPSOR\HGLVWKHQGHILQHGE\  $IWHUQRUPDOL]DWLRQZHWKXVKDYHWKHLGHQWLWLHV  IRUDOOW IRUDOOW DQGWKHPDUNHWFOHDULQJFRQGLWLRQV D IRUDOOW E IRUDOOW F IRUDOOW G   IRUDOOW H IRUDOOW :HWXUQQRZWRWKHFHQWUDOTXHVWLRQRIWKHEHOLHIVRIWKHDJHQWV  $5DWLRQDO%HOLHI(TXLOLEULXP:LWK([RJHQRXV0RQH\6XSSO\ ,QWKLVVHFWLRQZHFRQVWUXFWWKH5%(ZLWKPRQH\VXSSO\SROLF\DQGH[SODLQWKHIDPLO\RI 5DWLRQDO%HOLHIVZKLFKZHVWXG\)RUFRPSOHWHQHVVRIH[SRVLWLRQZHSURYLGHLQ$SSHQGL[$DQ DFFRXQWRIWKHGHILQLWLRQRID5DWLRQDO%HOLHI)RUGHWDLOVVHH.XU]DQGIRUDVXPPDU\RI WKHWKHRU\DQGWKHPHWKRGRIFRQVWUXFWLQJDQ5%(VHH.XU]0RWROHVH,Q$SSHQGL[$DQG 6HFWLRQZHH[SODLQWKHPHWKRGRIDVVHVVPHQWYDULDEOHVXVHGH[WHQVLYHO\LQWKLVSDSHUIRU GHVFULELQJD5DWLRQDO%HOLHI

4 \ 

L



k



n

 [

_'



L



k



n

 N  
  Q 
  Q  
  E 
  N  
  Q  
  Q   
  E 
  P  
  P 
  T   T


B

 [ 


'

N  
  Q 
  Q  
  E  
  P 
  N   
  Q 
  Q  
  E 
  P  
  [  \  N 

'

N  

L



k



n

 [ 
  T   T


B

 \  7KHHPSLULFDOGLVWULEXWLRQRIWKHREVHUYDEOHYDULDEOHVRUWKHLUPRPHQWVLQGXFHDSUREDELOLW\PHDVXUHRYHU  LQILQLWHVHTXHQFHVRIREVHUYDEOHVZKLFKLVFHQWUDOWRWKHWKHRU\RI5DWLRQDO%HOLHIV7KHGHILQLWLRQDQGFRQVWUXFWLRQ RIWKLVSUREDELOLW\PHDVXUHLVH[SODLQHGLQ$SSHQGL[$$Q\VWDWHPHQWLQWKHWH[WDERXW³WKHVWDWLRQDU\PHDVXUH´RU ³WKHHPSLULFDOGLVWULEXWLRQ´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6XFKFRQVWUXFWLYHSURFHGXUHLVSRVVLEOHRQO\ZKHQZHVWXG\DVSHFLILFIDPLO\RI5DWLRQDO %HOLHIVDQGZHFRPPHQWODWHURQWKLVDSSURDFKDVDPHWKRGRIXVLQJWKHGLVWULEXWLRQRIEHOLHIVLQ WKHPDUNHWWRH[SODLQDJJUHJDWHSKHQRPHQD:HFDUU\RXWWKLVSURFHGXUHLQVHYHUDOVWHSV 5HFDOOWKDWLQWKHRSWLPL]DWLRQD¶E¶DJHQWNGHULYHVRSWLPDOGHFLVLRQVE\XVLQJEHOLHI FRQGLWLRQDORQSXEOLFLQIRUPDWLRQDQGRQ WKHYDOXHRIKLVRZQDVVHVVPHQWYDULDEOH:H DVVXPHWKDWDOOSRUWIROLRVDQGH[RJHQRXVVKRFNV DUHREVHUYDEOH7KHREVHUYDEOHVDUH 7RVLPSOLI\GHQRWH ODJJHGHQGRJHQRXVYDULDEOHV $JHQWN ZLOOWKXVFRQGLWLRQRQ DQGKHQFHRSWLPDOGHFLVLRQVDUHIXQFWLRQVRIWKHIRUP D N 

Q

'

L 

L



k



n

 [
  T   T 

B

 \  Q 

'

L  

L



k



n

 [  
  T   T


B

 \  E

'

E 

L



k



n

 [ 
  T   T


B

 \  P

_'

E 

L



k



n

 [ 
  T   T


B

 \ 

R

_{' R}



_L

_

_k

_

_n

_{ [} 
  T   T


B

 \   T   T


B

 T  T

B

' M



L



k



n

 \   \   [ 
  

L



k



n

 [ 
  \   \    \   \   \ \ \  E N  F N  G N  H N  I N  0DUNHWFOHDULQJFRQGLWLRQVLPSO\WKDWWKHHTXLOLEULXPSULFHSURFHVV^ W `LV WKXVGHILQHGE\DPDSRIWKHIRUP  UHYHDOVWKDWWKHYRODWLOLW\RIHTXLOLEULXPSULFHVLVGHWHUPLQHGE\WKUHHIDFWRUVE\H[RJHQRXV VWDWHV E\ODJJHGHQGRJHQRXVYDULDEOHV DQGE\WKHVWDWHVRIEHOLHI  ³(QGRJHQRXV8QFHUWDLQW\´ZDVGHILQHGE\.XU]DVWKDWFRPSRQHQWRIHFRQRPLF YRODWLOLW\ZKLFKLVJHQHUDWHGE\WKHGLVWULEXWLRQRIEHOLHIVLQWKHPDUNHWUHSUHVHQWHGE\  ,Q6HFWLRQZHH[SODLQWKDWDQDVVHVVPHQWYDULDEOHV LVDVLPSOHPDWKHPDWLFDOUHSUHVHQWDWLRQ RIDSULYDWHVWDWHRIEHOLHI LVDSULYDWHO\VHOHFWHGSDUDPHWHURIWKHDJHQW¶VEHOLHIXQLTXHO\ GHILQLQJKLVFRQGLWLRQDOSUREDELOLW\EHOLHIRYHUREVHUYDEOHV7KHVWDWHVRIDQDJHQW¶VEHOLHIDUH UHVWULFWHGE\WKHUDWLRQDOLW\RIEHOLHIFRQGLWLRQVGHWDLOHGLQ$SSHQGL[$5DWLRQDOLW\FRQGLWLRQV DUHLQHVVHQFHIDPLOLDUPRPHQWUHVWULFWLRQVZKLFKLPSRVHHPSLULFDOUHJXODULW\RQWKHEHOLHIV LQGXFHGE\ IRUHDFKDJHQWNDQGRQWKHPDQQHUWKH\DIIHFWWKHFRQGLWLRQDOSUREDELOLWLHVRIWKH REVHUYDEOHVXVHGE\WKHDJHQW7KHVHUHVWULFWLRQVZLOOEHVSHFLILHGODWHU 7KH(XOHUHTXDWLRQVDQGWKHGHILQLWLRQRIFRQVXPSWLRQLQE¶G¶VKRZWKDWDWDQ\GDWH



L

 

k

 

n

  

L



k



n

  N    Q  Q    E 

R

  P  \  T    T
 

B

  \ 

L



k



n

 \   \   

L



k



n

 \   \    WDJHQWNQHHGVWRIRUHFDVWWKUHHFDWHJRULHVRIYDULDEOHV

LH[RJHQRXVYDULDEOHV FRQGLWLRQDOXSRQ DQGRWKHU

LQIRUPDWLRQDWW LLKLVRZQGHFLVLRQVDWW ZKLFKKHIRUHFDVWVEDVHG RQKLVRZQRSWLPDOGHFLVLRQIXQFWLRQVDQGDIRUHFDVW RIKLVRZQDVVHVVPHQW LLLRWKHUHQGRJHQRXVYDULDEOHVSDUWLFXODUO\SULFHV FRQGLWLRQDOXSRQDOO SXEOLFLQIRUPDWLRQDQGKLVRZQDVVHVVPHQW  )RUHFDVWLQJRIWKHDJHQWVLVH[SORUHGLQWKHQH[WVHFWLRQZKHQZHIRUPXODWHWKHEHOLHIVVWUXFWXUH 6LQFHWKHUDWLRQDOLW\RIEHOLHIFRQGLWLRQVUHTXLUHWKDWDOOPRPHQWVRIDQDJHQW¶VVXEMHFWLYHPRGHO EHH[DFWO\WKHVDPHDVWKHPRPHQWVRIWKHHPSLULFDOGLVWULEXWLRQZKLFKZHFDOO³WKHVWDWLRQDU\ PHDVXUH´GHULYHGIURPWKHPDUNHWGDWDDIRUPXODWLRQRIWKHEHOLHIVRUSHUFHSWLRQPRGHOVRI DJHQWVQHFHVVLWDWHVRXUVSHFLI\LQJILUVWWKHJHQHUDOVWUXFWXUHRIWKHVWDWLRQDU\PHDVXUH   &RQVWUXFWLRQRIWKHVWDWLRQDU\PHDVXUH 2XU5%(ZLOOEHDVWRFKDVWLFSHUWXUEDWLRQRIDQHFRQRP\ZKLFKKDVORQJWHUPVWHDG\VWDWH YDULDEOHVGHQRWHGE\ 6LQFHHTXLOLEULXPTXDQWLWLHVVDWLVI\WKH(XOHUHTXDWLRQVDQGWKH HTXLOLEULXPPDSWKHHPSLULFDOGLVWULEXWLRQRIDOOYDULDEOHVLVGHWHUPLQHGMRLQWO\E\WKH HTXLOLEULXPPDSDQGWKHORQJWHUPEHKDYLRURIWKHIRXUNH\YDULDEOHV WKH SURGXFWLYLW\VKRFNWKHPRQHWDU\VKRFNLQYHVWPHQWFRVWVKRFNDQGWKHVWDWHVRIEHOLHI+HQFHWKH FRQVWUXFWLRQRIDQ5%(ZKLFKIROORZVWKHVDPHVWHSVXVHGLQ.XU]DQG0RWROHVHUHTXLUHV XVWRVSHFLI\ILUVWWKHORQJWHUPEHKDYLRURI 7KHVHYDULDEOHVLQWXUQ GHWHUPLQHWKHORQJWHUPHPSLULFDOGLVWULEXWLRQRIWKHV\VWHP2QFHWKLVLVGRQHZHVSHFLI\WKH



L



k



n

  \   \   ORJ

L

 

' 8

 ORJ

L % D

  

D



-

_{1  }

_F

   ORJ

k



'

ORJ

k



% 8

> ORJ

k &

ORJ

k

 @

% D

 

D -

1  

F

 

n



' D

 

D



-

_{1  }

_F

    \   \   \  \ 

'

D

D



D

D



-

₁   

F

 

F

F



F

 

n



D

 

D



n



D



D




k



' L

 

L

 

L

  

L



k

  EHOLHIVDQGSHUFHSWLRQRIWKHDJHQWVDQGLPSRVHWKHUDWLRQDOLW\FRQGLWLRQVZKLFKIL[WKH FRQVLVWHQF\EHWZHHQWKHHPSLULFDOGLVWULEXWLRQRIREVHUYHGPDUNHWYDULDEOHVDQGWKHVXEMHFWLYH PRGHOVRIWKHDJHQWV :HWKXVDVVXPHWKDWWKHORQJWHUPEHKDYLRURIWKHH[RJHQRXVYDULDEOHV DQGRI WKHDVVHVVPHQWYDULDEOHV KDYHWKHIROORZLQJVWUXFWXUH D  LLG E  LLG F   LLG 7KHVHTXHQFHRIVWDWHV^ W `LVDUHDOL]DWLRQRIDVWRFKDVWLFSURFHVVRIWKHIRUP G   LLG (TXDWLRQDZDVGLVFXVVHGHDUOLHU(TXDWLRQVEGDUHK\SRWKHWLFDODQGTXDQWLI\WKH DVVXPSWLRQVPDGHHDUOLHU3HUVLVWHQFHLQWKHPRQHWDU\VKRFNLVLQWURGXFHGLQRUGHUWRHYDOXDWHWKH LPSDFWRIVXFKSHUVLVWHQFHWKHLLGDVVXPSWLRQRIWKHVKRFNV LQWKHLQYHVWPHQWVHFWRUKDYH DOUHDG\EHHQGLVFXVVHGDQGLWVLPSOLFDWLRQVZLOOEHHYDOXDWHGODWHUGVSHFLILHVWKHHPSLULFDO UHJXODULW\RIWKHVWDWHVRIEHOLHIDQGWKHLLGDVVXPSWLRQVLPSOLILHVWKHFRPSXWDWLRQVDQGHQDEOHVD WUDQVSDUDQWVWDWHPHQWRIWKHUDWLRQDOLW\FRQGLWLRQVZKLFKDUHVSHFLILHGODWHU :HPDNHWKHIROORZLQJDGGLWLRQDOVLPSOLI\LQJDVVXPSWLRQV $ DUHPXWXDOO\LQGHSHQGHQW $ KHQFH DUHWKHVWHDG\VWDWHYDOXHVRI LQWKHULVNOHVVHFRQRP\DQG WKHORQJWHUPDYHUDJHLQIODWLRQUDWHLV]HURLQERWK5((DQG5%(

8



'

 

F



'



F



'



8 '

 

F '

  \   \  

F

' F

'



D

 \   \  

'



F

'

  ;    ;    ;    ;    $ 7RFRQIRUPWRWKH5%&OLWHUDWXUHZHVSHFLI\ WRHQVXUHKLJK SHUVLVWHQFHLQWKHUDQGRPWHFKQRORJLFDOVKRFNDQGORZYDULDQFHLQDFFRUGZLWKRXU GLVFXVVLRQLQWKHLQWURGXFWLRQWRWKLVSDSHU $ $VPRQHWDU\VKRFNVDQGWKHVWRFKDVWLFLQYHVWPHQWWHFKQRORJ\DUHK\SRWKHWLFDOZHVSHFLI\  7KLVLPSOLHVWKHVWDQGDUGGHYLDWLRQRIPRQHWDU\VKRFNV RYHUWLPHLVSHUTXDUWHU7KHVHDVVXPSWLRQVDUHLQWHQGHGWRHQDEOHDTXDQWLWDWLYH HYDOXDWLRQRIWKHZRUNLQJVRIRXUPRGHOE\SRVWXODWLQJSHUVLVWHQFHLQWKHPRQHWDU\VKRFNV ZLWKDUHDVRQDEOHVWDQGDUGGHYLDWLRQ$VIRU ZHDVVXPH  FRUUHODWLRQFRHIILFLHQW KHQFH  7KLVFRPSOHWHVWKHVSHFLILFDWLRQRIWKHVWRFKDVWLFVWUXFWXUHZKLFKGHWHUPLQHVWKHHPSLULFDO GLVWULEXWLRQRIDOOREVHUYHGYDULDEOHVLQWKHPRGHO  7KH%HOLHI6WUXFWXUH D *HQHUDO$VVXPSWLRQV ,QWKLVVHFWLRQZHVSHFLI\RXUDVVXPSWLRQVDERXWWKHEHOLHIVRIWKHDJHQWV$VVHVVPHQW YDULDEOHVDUHWKHPHWKRGZHXVHWRGHVFULEHDQDJHQW¶VEHOLHIDQGWKHVWUXFWXUHRIVXFKYDULDEOHVLV GLVFXVVHGLQ$SSHQGL[$)RUFRPSOHWHQHVVZHLQFOXGHDUHYLHZRIWKLVLVVXHKHUH  L7KHPDWKHPDWLFDOVWUXFWXUHRIDVVHVVPHQWYDULDEOHV/HW;EHDVSDFHRIREVHUYDEOHVDQG VXSSRVHZHZDQWWRGHVFULEHLQDWUDFWDEOHPDQQHUWKHQRQVWDWLRQDULW\RIDG\QDPLFDOV\VWHPRQ WKHPHDVXUDEOHVSDFHRILQILQLWHVHTXHQFHVRIREVHUYDEOHV % ZKHUH% LVWKH

\

,

<  < 
 < 
 ; î<   ; î< 
 ; î< 
4

/

4 

C

 _ \  4 $ î %

_{' m}

 4 $ — G\  ; 
 ; 
 ; 
\  W

_'

       \ \ 4   \ \   1LHOVHQGHVFULEHVQRQVWDWLRQDULW\YLDDUWLILFLDOYDULDEOHV ZLWKDPDUJLQDO

SUREDELOLW\VSDFH % —,WSRVWXODWHV WREHWKHVWDWHVSDFHLQWURGXFHVD XQLYHUVDOSUREDELOLW\PHDVXUH4DQGVSDFH % 4DQGGHILQHVWKHGHVLUHG QRQVWDWLRQDU\SUREDELOLW\WREH WKHFRQGLWLRQDOSUREDELOLW\RI4ZLWKUHVSHFWWR WKHVHTXHQFH\4PXVWVDWLVI\WKHFRQGLWLRQWKDWIRUDOO$

,

%; DQG%

,

%<        7KHHIIHFWLYHFRQGLWLRQDOSUREDELOLW\VSDFH % 4 LPSOLHVQRQVWDWLRQDU\G\QDPLFV RIWKHREVHUYDEOHVVLQFHSUREDELOLWLHVRIHYHQWVLQ% DUHQRWWLPHLQGHSHQGHQWWKH\FKDQJH ZLWKWKHSDUDPHWHUV\ ZKLFKDUHWLPHGHSHQGHQW$OWKRXJKWKH\ DUHIL[HGSDUDPHWHUVIURPWKH

      

SRLQWRIYLHZRIWKHDJHQWWKHVWRFKDVWLFVWUXFWXUHDERYHSLQVGRZQWKHHPSLULFDOUHJXODULW\DQG WLPLQJRIWKHVHSDUDPHWHUVLQUHODWLRQWRREVHUYDEOHV,I4 GHVFULEHVDOOWKHQRQVWDWLRQDULW\RIWKH

JLYHQV\VWHPWKHQZHLQWHUSUHWWKHVHTXHQFH DVDPDWKHPDWLFDOGHVFULSWLRQRI

QRQVWDWLRQDULW\7KLVDSSURDFKLVFRPPRQLQHFRQRPHWULFVZKHUH<LVWKHVHWRISRVVLEOH

³UHJLPHV´ LGHQWLILHVWKHUHJLPHDWWDQGKHQFHWKH DUHYLHZHGDV³UHJLPHYDULDEOHV´

LL(FRQRPLF,QWHUSUHWDWLRQ,QWKLVSDSHUZHXVHWKHDERYHPHWKRGWRGHVFULEHWKHSHUFHLYHGQRQ VWDWLRQDULW\RIDJHQWV7KXV LVWKHGDWHWSUREDELOLW\EHOLHIRIIXWXUHREVHUYDEOHVE\NDQG  WKHDVVHVVPHQWYDULDEOHLVXVHGWRGHVFULEHWKHDJHQW¶VEHOLHILQGHYLDWLRQVRIWKHPHDQYDOXH YDULDQFHRURWKHUPRPHQWVRIWKHGLVWULEXWLRQVRIREVHUYDEOHYDULDEOHVIURPWKHYDOXHVVSHFLILHGE\ WKHVWDWLRQDU\PHDVXUH,QVLPSOHWHUPV DUHXVHGWRGHVFULEHKRZWKHDJHQW¶VIRUHFDVWVGHYLDWH IURPWKHVWDWLRQDU\HFRQRPHWULFIRUHFDVWZKLFKLVFRQVWUXFWHGE\XVLQJDOOSDVWGDWDXQGHUWKH DVVXPSWLRQWKDWWKHHQYLURQPHQWLVVWDWLRQDU\6HYHUDOWKLQJVVKRXOGEHHYLGHQW

 LGHYLDWLRQVIURPWKHORQJWHUPIRUHFDVWLVDMXGJHPHQWEDVHGRQOLPLWHGUHFHQWGDWDUDWKHUWKDQ RQWKHUHJXODULW\RIWKHORQJWHUPGDWD6XFKMXGJPHQWVRI³VWUXFWXUDOEUHDNV´LQWKH SURFHVVRIWKHREVHUYDEOHVPD\EHULJKWRUZURQJ5DWLRQDODJHQWVDUHRIWHQZURQJ LLLQDQRQVWDWLRQDU\HQYLURQPHQWWKHUHLVOLWWOHGDWDWRUHMHFWDQRSLQLRQRIFKDQJHLQVWUXFWXUH ,WLVWKXVXVXDOO\QRWSRVVLEOHWRGHPRQVWUDWHZLWKKLJKOLNHOLKRRGWKDWDEHOLHIZDVULJKWRU ZURQJHYHQLQUHWURVSHFW$OVRHYHQLIVXIILFLHQWGDWDEHFRPHVDYDLODEOHWRGHWHUPLQH ZLWKKLJKSUREDELOLW\LIDFKDQJHRIVWUXFWXUHDFWXDOO\RFFXUUHGVXFKLQIRUPDWLRQDUULYHV WRRODWHVLQFHDOOLPSRUWDQWHFRQRPLFGHFLVLRQVZRXOGKDYHDOUHDG\EHHQPDGH LLLUDWLRQDODJHQWVGRQRWGHYLDWHV\VWHPDWLFDOO\IURPWKHORQJWHUPVWDWLRQDU\HFRQRPHWULF IRUHFDVWV+HQFHD5DWLRQDO%HOLHILVUHTXLUHGWRJHQHUDWHWKHVDPHORQJWHUPPRPHQWVDV WKHVWDWLRQDU\PHDVXUH7KLVLPSOLHVWKDWDOOORQJWHUPDYHUDJHVRIWKHDJHQW¶VFRQGLWLRQDO IRUHFDVWVHTXDOWKHFRQGLWLRQDOIRUHFDVWPDGHXQGHUWKHVWDWLRQDU\PHDVXUH LLL$VVHVVPHQWYDULDEOHVSURYLGHWKHPLQLPDOVWUXFWXUHQHHGHGIRUPRGHOLQJGLYHUVHEHOLHIV$ WKHRU\ZKLFKXVHVWKHGLVWULEXWLRQRIEHOLHIVWRH[SODLQREVHUYHGPDUNHWSKHQRPHQDIDFHVWKH SUREOHPRIGHWHUPLQLQJWKHOHYHORIGHWDLOLQZKLFKDJHQWVGHVFULEHKRZWKH\DUULYHDWWKHEHOLHIV ZKLFKWKH\KROG7KDWLVZKDWLVWKHOHYHORIGHWDLOLQZKLFKWKHVXEMHFWLYHPRGHORIWKHDJHQW QHHGVWREHVSHOOHGRXW",IRQHLQVLVWVRQFRPSOHWHVSHFLILFDWLRQRIVXFKPRGHOLQJWKHWKHRU\LV GRRPHGWRJHWERJJHGGRZQLQHQGOHVVGHWDLOVDERXWLQIHUHQFHIURPVPDOOVDPSOHVDQGDERXW LQIRUPDWLRQSURFHVVLQJ$OWKRXJKVXFKDQDSSURDFKZRXOGUDLVHLQWHUHVWLQJLVVXHVIURPWKH SHUVSHFWLYHRIHTXLOLEULXPWKHRU\LWLVFRXQWHUSURGXFWLYHDQGXQQHFHVVDU\$QH[DPLQDWLRQRIWKH (XOHUHTXDWLRQVVKRZVWKDWDOOHTXLOLEULXPDQDO\VLVUHTXLUHVLVDVSHFLILFDWLRQRIWKHGLVWULEXWLRQRI

 \  \
 \  \  \   \   W DQG W
\  \   EHOLHIVLQWKHPDUNHWH[SUHVVHGDVWKHVXEMHFWLYHIRUHFDVWLQJHTXDWLRQVZKLFKDUHWKHSHUFHLYHG FRXQWHUSDUWVRIDG)RUDQDJHQWZKRVHVXEMHFWLYHPRGHOGHYLDWHVIURPDG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³KRZGLGWKHDJHQWV DUULYHDWWKHLUVSHFLILHGSHUFHSWLRQPRGHOV´VHHSHUFHLYHGPRGHOVEHORZLVQRWDSSOLFDEOH LY5DWLRQDODJHQWVPD\EHZURQJDQGDVVHVVPHQWYDULDEOHVDUHQRWVXEMHFWWRUDWLRQDOLW\ FRQGLWLRQV,QDQ5%(DJHQWVW\SLFDOO\GRQRWEHOLHYHWKDWWKHSDVWLVDJRRGJXLGHWRWKHIXWXUH $QHFRQRP\ZLWKFKDQJLQJWHFKQRORJ\DQGSURGXFWVLVRQHLQZKLFKWKHFRPPRGLW\VSDFHFKDQJHV ZLWKWLPHDQGKHQFH DWGLIIHUHQWWLPHVDUHWRROVWRGHVFULEHEHOLHIVDERXWGLIIHUHQWFRPPRGLWLHV RUWHFKQRORJLHV+HQFH DQG IRU LQGLIIHUHQWWLPHLQWHUYDOVDUHVLPSO\GLIIHUHQW

REMHFWVPDNLQJFRPSDULVRQVLPSRVVLEOH8QGHUVXFKFLUFXPVWDQFHVRQHFDQQRWHYHQGHILQHD

VWDWLVWLFDOUHODWLRQVKLSVEHWZHHQ DQGWKHREVHUYDEOHVDQGKHQFHWKHUHLVQRVHQVHLQZKLFK

UDWLRQDOLW\FRQGLWLRQVFDQEHUHTXLUHGWRDSSO\7KXVWKH5%(WKHRU\KDVLQVLVWHGWKDWWKH DUH SULYDWHO\SHUFHLYHGSDUDPHWHUVDQGQRUDWLRQDOLW\FRQGLWLRQVVKRXOGDSSO\WRWKHP

\  \  \  \  \  +HQFHRQHGHILQHVFRPPRGLWLHVE\WKHLUDWWULEXWHVVXFKDV³WUDQVSRUWDWLRQHTXLSPHQW´LQVWHDGRI ³DLUSODQHV´RU³FRPPXQLFDWLRQVHUYLFHV´LQVWHDGRI³WHOHSKRQH´2YHUWLPHZHWKHQH[SHULHQFHFKDQJHLQWKHFRVW RISURGXFLQJWKHVHVHUYLFHVDQGWKHLUSULFHVUDWKHUWKDQFKDQJHLQWKHGHILQLWLRQVRIWKHSURGXFWVRUVHUYLFHV WKHPVHOYHV  LQILQLWHO\YDU\LQJUHJLPHVLVDQDO\WLFDOO\DQGFRPSXWDWLRQDO\XQWUDFWDEOH$QLGHDOL]DWLRQWKDW UHVXOWVLQDWUDFWDEOHPRGHOLQJVWUDWHJ\LVWRDVVXPHWKDWWKHFRPPRGLW\VSDFHLVIL[HGLQVL]H DQG DOWKRXJKSULYDWHSDUDPHWHUPHDQLQJIXOWRDJHQWNRQO\EHUHTXLUHGWRKDYHDFRQVLVWHQW PHDQLQJWRDQDJHQWWKURXJKWLPH%XWWKHQKRZGRZHPRGHOWKHIDFWWKDWLQUHDOLW\DQDJHQW FDQQRW³WHVW´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$VVHVVPHQWYDULDEOHVDUHQRW³REMHFWLYH´LQIRUPDWLRQ:HVWUHVVWKDW DUHJHQHUDWHGE\DQ DJHQWKLPVHOISURYLGLQJDYRFDEXODU\WRGHVFULEHKLVEHOLHI)URPDQLQIRUPDWLRQDOSHUVSHFWLYH

[


'

 N 
  Q  
  Q 
 E 
  N  
  Q  
  Q  
 E 
  P 
  P 
  

L



k



n

 \ [

_'

 [  

L



k



n

 [

_'

 [  

L



k



n

 \  \
  [  

L



k



n

 5HFDOOWKDW LVWKHYHFWRURIODJJHGHQGRJHQRXV  YDULDEOHVDQG LVWKHYHFWRURIWKUHHH[RJHQRXVYDULDEOHVLQWKHPRGHO  DUHSULYDWHO\SHUFHLYHGYDULDEOHVUHIOHFWLQJKRZDQDJHQWLQWHUSUHWVFXUUHQWLQIRUPDWLRQ7KHVH YDULDEOHVKDYHSXUHO\VXEMHFWLYHPHDQLQJDQGVKRXOGQRWEHWDNHQDVREMHFWLYHDQGWUDQVIHUDEOH LQIRUPDWLRQ7HFKQLFDOO\VSHDNLQJGHFLVLRQIXQFWLRQVRIDJHQWLDUHQRWPHDVXUDEOHZLWKUHVSHFW WR\ IRUL

ú

MDJHQWLZRXOGQRWEHDEOHDWGDWHWWRLQWHUSUHW\ HYHQLIKHFRXOG³NQRZ´LW

                                  YL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³IXQGDPHQWDO´YDULDEOHVWKHORQJWHUPGLVWULEXWLRQRISULFHVDQGRWKHU HQGRJHQRXVYDULDEOHVLQDQ5%(LVGHWHUPLQHGE\WKHWLPHYDULDELOLW\RIWKHVWDWHVRIEHOLHI 6LQFHVWDWHVRIEHOLHIDUHQRWREVHUYHGRUNQRZQE\WKHDJHQWVWKH\GHGXFHWKHLULPSDFW IURPWKHORQJWHUPGLVWULEXWLRQRIHQGRJHQRXVYDULDEOHVFRQGLWLRQDOXSRQ 6WDWHV

 [  

L



k



n

 ]  \  \
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³(QGRJHQRXV 8QFHUWDLQW\´HJ.XU]DQGWKLVDUJXPHQWVKRZVWKDWLQOHDUQLQJWKHVWDWLRQDU\ PHDVXUHDJHQWVDOVRJHWWRGLVFRYHUWKHFRPSRQHQWRIWKHVWDWLRQDU\PHDVXUHZKLFKLVLQGXFHGE\ WKHGLVWULEXWLRQRIEHOLHIV,QJHQHUDOWKH\GRQRWKDYHWREHOLHYHWKDWWKHLPSDFWRIWKH GLVWULEXWLRQRIEHOLHIVRQHQGRJHQRXVYDULDEOHVDWDQ\GDWHLVWKHVDPHDVWKHLUNQRZQORQJWHUP FRPSRQHQWRIWKHVWDWLRQDU\PHDVXUH)RUVLPSOLFLW\ZHPDNHWKHVLPSOLI\LQJDVVXPSWLRQ YLL)RUHFDVWLQJ$VVXPSWLRQ3,$JHQWVEHOLHYHWKDWWKHHQGRJHQRXVLPSDFWRIPDUNHWVWDWHVRI EHOLHIRQSULFHVDQGRWKHUHQGRJHQRXVYDULDEOHVLVWKHVDPHDVWKDWFRPSRQHQWZKLFKLVHVWLPDWHG IURPWKHVWDWLRQDU\PHDVXUH :HILQDOO\WXUQWRRXUODVWVLPSOLI\LQJDVVXPSWLRQUHJDUGLQJWKHIRUHFDVWLQJRISULFHVLQWKHPRGHO YLLL)RUHFDVWLQJ$VVXPSWLRQ3,, $JHQWVIRUHFDVWSULFHVXVLQJWKHHTXLOLEULXPPDSDQG
SHUFHLYHWKHLPSDFWRIVWDWHVRIEHOLHIRQSULFHVDQGRWKHUHQGRJHQRXVYDULDEOHVYLDDYDULDEOH ZLWKGLVWULEXWLRQDOSURSHUWLHVZKLFKDUHWKHVDPHDVWKHORQJUXQGLVWULEXWLRQDOSURSHUWLHVRIWKH XQREVHUYHGVWDWHVRIEHOLHI  $VVXPSWLRQ3,,LVQRWHQWLUHO\FRPSDWLEOHZLWKSRVWXODWHVRIWKH5%(WKHRU\ZKLFKKROGV

\  )RUDGLVFXVVLRQRIWKHUHODWLRQVKLSEHWZHHQDQ5%(DQGRWKHUHTXLOLEULXPFRQFHSWVLQFOXGLQJVXQVSRW 
HTXLOLEULDVHH.XU]DQG0RWROHVH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ZLWKDQH[SDQGHGVWDWHVSDFHRIWKHXQREVHUYHGVWDWHVRIEHOLHIV VLQFHWKHXVXDO5DGQHUHTXLOLEULXPGRHVQRWLQFRUSRUDWHVXFKXQREVHUYHGVWDWHYDULDEOHV7KH PDUNHWLVLQFRPSOHWHVLQFHDJHQWVKDYHRQO\WZRDVVHWVWRWUDGHPDUNHWXQFHUWDLQW\  
'LYHUVHSHUFHLYHGHTXLOLEULXPPDSVLVDSUREOHPZKLFKZHKRSHWRH[SORUHLQIXWXUH UHVHDUFK +RZHYHUZHVWUHVVWKDWLQWKHSUHVHQWPRGHOWKHFUXFLDOIHDWXUHRIWKH5%(LVWKH  DVVXPSWLRQWKDWVWDWHVRIEHOLHIVDUHSULYDWHWKDWDJHQWVGRQRWREVHUYHWKHVWDWHRIEHOLHIVRIRWKHUV DQGFRXOGQRWUHFRQVWUXFWWKHPIURPWKHHTXLOLEULXPPDSVLQFHWKHEHOLHIVRIRWKHUDJHQWVLQWKH SDVWDUHGLIIHUHQWDQGLQFRPSDUDEOHREMHFWV:HWXUQQRZWRWKHVSHFLILFDWLRQRIWKHEHOLHIRU SHUFHSWLRQPRGHOVRIWKHDJHQWV E 7KH3HUFHSWLRQ0RGHOV ,QGZHVSHFLILHGWKHDV\PSWRWLFEHKDYLRURIWKHMRLQWVWDWHRIEHOLHIWREHGHVFULEHGDV DUHDOL]DWLRQRIDQLLGSURFHVV7KHUDWLRQDOLW\FRQGLWLRQVUHTXLUHWKDWPDUJLQDOGLVWULEXWLRQVRI PXVWKDYHFRPSDWLEOHDV\PSWRWLFSURSHUWLHV+HQFHZHSRVWXODWHWKDWWKHVWDWHRIEHOLHIRI

\ 

' F


] 
] 
× ] 
a 1

F


ORJ

L

 

' 8

 ORJ

L



% 8

  

k

  \ 

% F




k

  Ö]     ]Ö   a 1 

8

 \ 

k

 \  \   DJHQWNRQKLVRZQWDNHVWKHIRUP 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 7KHDJHQWEHOLHYHVWKDW LVDVVSHFLILHGLQDEXWWKDWWKHPHDQYDOXHIXQFWLRQRIWKHSURFHVV YDULHVZLWK 6LQFHWKHVWDWLRQDU\PHDVXUHLQDGDVVXPHVQRORQJWHUPFRYDULDQFH EHWZHHQSURGXFWLYLW\VKRFNVPRQHWDU\VKRFNVRUVWDWHVRIEHOLHIWKHUDWLRQDOLW\FRQGLWLRQVLPSRVH WKHVHUHVWULFWLRQV7KH\UHTXLUHWKDWFRQGLWLRQDORQ WKHORQJWHUPVWDWLVWLFVRIREVHUYDEOHV JHQHUDWHGE\DQGDDUHWKHVDPHZKHQWKHVWDWHVRIEHOLHI DUHWUHDWHGDVXQREVHUYHG VKLIWVLQWKHPHDQYDOXHIXQFWLRQRIWKHSURFHVV0RUHJHQHUDOO\FRQGLWLRQDORQDQ\VHWRIVWDWH YDULDEOHVWKHPRPHQWVRIWKHREVHUYDEOHVLPSOLHGE\WKHDJHQW¶VPRGHOPXVWEHWKHVDPHDVWKH PRPHQWVLPSOLHGE\WKHVWDWLRQDU\PHDVXUH1RUDWLRQDOLW\FRQGLWLRQVDUHLPSRVHGRQ RURQ

\ ORJ

L

 

8

  

k

 

F



k

 

k



k



' k

k

 \  Ö ]  

K

  

' 8

  

k

  \ 

% F




k

  Ö]   

k



K

 

F

 

8

  

k

  

F

%



F



k

  

' F



k



K

   

k

  1   

F

 

8

  

k

 

8

  

k

 

_'

8

  

_%

H 
 


P

 !  \  ORJ

L

 

8

  DQG

F



8

  

P

 

F



k

 

8



'

 

F



'



F

8

 

8

 

'



P



'

 ORJ

k



F

 WKHFRUUHODWLRQEHWZHHQ DQG LQDFFRUGZLWKRXUGLVFXVVLRQHDUOLHULQWKLVVHFWLRQ ,QDJHQWVIRUPEHOLHIVWKDW DQG GHSHQGXSRQWKHPRQHWDU\VKRFN 7KLVDVVXPSWLRQLVGLVFXVVHGODWHULQWKHFRQWH[WRIHYDOXDWLQJRXUUHVXOWV)RFXVLQJKHUHRQWKH UDWLRQDOLW\FRQGLWLRQVREVHUYHILUVWWKDWZKHQGLVFXVVLQJSHUFHSWLRQZHZULWH EXWUDWLRQDOLW\ UHTXLUHVWKDWIRUREVHUYDEOHVSHUFHSWLRQHTXDOVUHDOL]DWLRQVKHQFH 1H[WFRQGLWLRQDOXSRQ

WKHWLPHDYHUDJHVRI DQGRI DUHERWKLPSO\LQJWKDWWKHWLPHDYHUDJHRIWKH H[SUHVVLRQ

D 

LVDOVRDVUHTXLUHGE\D+RZHYHUDDOVRUHTXLUHVWKDWFRQGLWLRQDOXSRQ WKHVHFRQG PRPHQWRI HTXDOV 7KLVOHDGVWRWKHUDWLRQDOLW\FRQGLWLRQRQWKHYDULDQFH

E 

,QIDFWFRQGLWLRQDOXSRQ WKHHPSLULFDOGLVWULEXWLRQRI LVH[DFWO\ :HXVHD VSHFLILFIXQFWLRQDOIRUPLQZKLFKPRQHWDU\VKRFNVLPSDFW DQGWKLVIXQFWLRQLV

F  

,QFWKHIXQFWLRQLVLQFUHDVLQJLQWKHVL]HRIPRQHWDU\VKRFNVDQGKHQFHVXFKVKRFNVLQFUHDVH WKHHIIHFWRI RQWKHSHUFHLYHGPHDQYDOXHRI LQ7KHFRPELQHGHTXDWLRQV EFUHVWULFWWKHYDOXHVRI ZKLFKDJHQWVFDQVHOHFWLQ,QWKHVLPXODWLRQV ZHVHWWKHYDOXHVRI DQGWKHUDWLRQDOLW\FRQGLWLRQVDERYHGHWHUPLQHWKHIXQFWLRQDOIRUP RI :HKDYHDOUHDG\H[SODLQHGWKDW DQG  IRUN  +HQFHWKHIHDVLEOHUDQJHIRU LVYHU\VPDOO,QWKHVLPXODWLRQVZHVHW 

ORJ

k

 

'

ORJ

L % 8

 ORJ

k



&

ORJ

L



% 8

  

k

  \ 

% F


 

k

  Ö]     ]Ö   a1  \  Ö ]   

K

  

' 8

  

k

  \ 

% F

 

k

  Ö]   

k



K

  

F

 

8

  

k

  

F

%



F


 

k

  

' F



K

  

k

k

K

  

k

8

  

k

 

_'

8

  

_%

H 
  


8

  DQG

F



8



'

 

F



'

 

F

'

 

P



'



8

 

'



F



k



n

Q 
Q 

%

Q 

'

    Q 

%

Q  

n

n

  3HUFHLYHG0RQHWDU\6KRFNVDQGWKHLU5DWLRQDOLW\&RQGLWLRQV $QDORJRXVWRWKHEHOLHIVRIDJHQWVDERXWIXWXUHPRQHWDU\VKRFNVDUHH[SUHVVHGE\ 

6LQFHWKHWLPHDYHUDJHVRI DQGRI DUHWKHWLPHDYHUDJHRI

D 

LVDOVRDVUHTXLUHGE\E+RZHYHUEDOVRUHTXLUHVWKDWFRQGLWLRQDOXSRQ WKHVHFRQG PRPHQWRI HTXDOV 7KLVOHDGVWRWKHUDWLRQDOLW\FRQGLWLRQRQWKHYDULDQFH

E 

$VIRUWKHFRUUHODWLRQRI ZLWK VLQFHFRQGLWLRQDOO\XSRQ WKHPHDQYDOXHRI LV LWIROORZVWKDWWDNLQJH[SHFWDWLRQVZLWKUHVSHFWWR LVDVUHTXLUHGE\E$VLQFWKH VSHFLILFIXQFWLRQDOIRUPLQZKLFKPRQHWDU\VKRFNVDIIHFWLV F  7KHVHHTXDWLRQVUHVWULFWWKHYDOXHVRI ZKLFKWKHDJHQWFDQVHOHFWLQ:HKDYH DOUHDG\VHOHFWHG DQGZHQRZDGG 7KHVH WRJHWKHUZLWKEFGHWHUPLQHWKHIXQFWLRQ  3HUFHLYHG,QYHVWPHQW6HFWRU6KRFNVDQGWKHLU5DWLRQDOLW\&RQGLWLRQV 7KHSHUFHLYHGVKRFNVLQWKHLQYHVWPHQWVHFWRUDUHWKHPDLQSURSDJDWLRQPHFKDQLVPRIWKH PRGHO,QGHHGLIDJHQWVEHOLHYHWKDWWKHWUXHSURFHVVRI LVLLGDVLQFWKH\IXOO\GLYHUVLI\ WKHLUSRUWIROLRVZLWK UHVXOWLQJLQDSHUIHFWKHGJHGSRVLWLRQDQGDQLQYHVWPHQW VWUHDPRI LQGHSHQGHQWRI ,QWKLV5((FDVHIOXFWXDWLRQVLQ KDYHQRHIIHFW RQWKHHFRQRP\:HWKXVVWUHVVWKDWRXUUHIHUHQFHVWHDG\VWDWHLVDULVN\HFRQRP\LQZKLFK