We would like to recognize Christopher Young for his recent work as a special editor in charge of soliciting and editing papers on commercial damages and business valuation. This issue contains the paper “Securities Litigation Event Studies in the Covid Volatility Regime” by Steven Feinstein and O. Miguel Villanueva, which is the first paper solicited by Chris that has reached the publication stage. There are other papers in the editorial pipeline that were also solicited by Chris that we expect to be published in future issues.
Kurt Krueger was a past Vice President and President of the National Association of Forensic Economics and a recipient of NAFE’s Past Presidents Award. Kurt also was a vital member of the Journal of Forensic Economics’ team in his role as Managing Editor and referee for papers submitted to the JFE. On his own and in collaboration with other researchers, Kurt’s publications made significant contributions to the field of forensic economics. During his lifetime, Kurt had 33 peer reviewed publications in the JFE, as well as papers in
Event studies play a central role in class action securities fraud litigation. Event studies are used to assess market efficiency, price impact, loss causation, and damages, all of which are essential elements of a securities fraud claim. However, a substantial increase in market-wide volatility, such as what happened in 2020 with the Covid-19 pandemic, can render the standard event study methodology unreliable. In these periods, the usual distributional assumptions for t-tests of significance produce too many false positives. In this paper, we examine the extent of the problem and propose a solution that employs the empirical distribution of the t-statistic during the Covid period to adjust the critical test statistic value. We demonstrate this methodology with an application using the 19 constituents of the consumer durables index S5CODU in PreCovid and Covid period samples, and with an evaluation of earnings announcement effects on stock prices. We show the methodology restores correct test size, eliminating excess spurious significance, while preserving substantial test power to correctly identify significant events in the Covid period.Abstract
Forensic economists have used Healthy Life Expectancy: 2018 Tables (Kurt V. Krueger, 2020) in valuing the loss of household or personal care services due to injury or death of their supplier. The tables are used to decide how far into the future to project the loss. We focus on two easily avoided errors that may arise in that decision. First, the present value (PV) of a healthy life annuity (HLA ending when death occurs) falls short of the PV of an annuity certain for the healthy life expectancy (HLE), at any positive interest rate. Second, services are lost only during the combined healthy life of the supplier and life of the recipient. The expected PV of the supplier’s healthy life and the recipient’s whole life falls short of either. The paper illustrates the size of these potential errors for various ages of the two people and net interest rates of 0-3%; the errors can be significant. We provide an Excel workbook at the Journal of Forensic Economics website that allows the user to avoid both errors for calculating the PV of relevant (healthy) life annuities, for any of the demographic groups covered in the HLE tables. The paper gives formulas used for the present values of the life tables.Abstract
This paper examines medical inflation forecasting based on a two-step method proposed by Gilbert (2019), whereby the medical inflation rate is forecast via the sum of two terms: a broad inflation published forecast and a historical average of the inflation gap—this being the difference between medical inflation and broad inflation. In a simple forecasting experiment, the two-step method compares favorably to the one-step method of forecasting medical inflation based on its past values alone. Stationarity tests applied to the inflation gap mostly support stationarity, with a possible historical break. The econometric results generally support the use of the two-step method, with a limited historical window for inflation gap averaging, consistent with Gilbert (2019).Abstract
A new method is proposed to project future costs for medical components of a life care plan. The technique estimates the historical link between inflation in medical components of the CPI and overall inflation. This linkage for each component can then be applied to a CPI forecast to project inflation in that underlying component. Estimates are made for 17 separate medical cost components of the CPI. Root mean square errors show that our proposed method for forecasting component inflation performs better than more commonly used forecast methods. Our method incorporates the best parts of both historical and forecasting methods; it utilizes information from the financial markets and professional surveys to form the baseline inflation forecast, then adjusts the value using historical data, thereby leveraging both expert opinion and empirical observation.Abstract
This article presents a guide for assessing economic damages in personal injury and wrongful death litigation in the state of Montana and is part of the Journal of Forensic Economics series of papers on this topic. The analysis provides experts with the information needed to produce opinions and give testimony on these subjects that is consistent common practice and Montana law.Abstract