Ex-Ante and Ex-Post8th May 2021 1 By indiafreenotes
Ex-ante refers to future events, such as the potential returns of a particular security, or the returns of a company. Transcribed from Latin, it means “before the event.”
Ex-ante is a Latin word that means “before the event,” and it is the estimated return that investors can expect to earn from an investment or the earnings that a company can expect to earn at the end of a specific period. In simple terms, it is the prediction of an event before it actually happens, and the actual outcome is uncertain. By making the prediction of the outcome, the obtained ex-ante value can then be compared to the actual performance when it happens.
Much of the analysis conducted in the markets is ex-ante, focusing on the impacts of long-term cash flows, earnings and revenue. While this type of ex-ante analysis focuses on company fundamentals, it often relates back to asset prices. For example, buy-side analysts often use fundamental factors to determine a price target for a stock, then compare the predicted result to actual performance.
For example, when preparing a merger of two competitors, analysts can predict the expected synergies that will emerge from such a transaction before it actually happens. The synergies may be in terms of changes in the share price, as well as the estimated earnings of the combined entity. The prediction can happen before the merger happens or immediately after the merger happens, but there is uncertainty about the possible effects of the transaction.
Ex-ante is the prediction of an event before it happens, or before the participants become aware of the event. The prediction may involve individual products of a business, a business unit, or the entire business entity. The predicted outcome serves as a basis for comparing the prediction to the actual results (ex-post).
For example, the Federal Reserve makes ex-ante predictions on expected inflation to decide whether to raise or lower interest rates. The prediction is not based on actual data, since the event will occur in the future, and does not know with certainty how the economic performance will be.
For example, if the Fed raises interest rates, we can only know if the decision was right or wrong when the predicted outcome happens. If the increased interest rates and global recession pushed the economy into inflation, it might mean that raising the interest rates was a wrong decision. However, if the economy is still stable and performing above board three to five years later, it means that the Fed’s decision to raise interest rates was appropriate and timely.
Ex-post is a Latin word that means “after the event,” and it is the opposite of the Latin word “ex-ante.” Investment companies use the concept to forecast the expected returns of a security based on the actual or historical returns earned by the security. Unlike ex-ante, which is based on estimated returns, ex-post represents the actual results attained by the company, which is the return earned by the company’s investors.
The use of historical returns has customarily been the most well-known approach to forecast the probability of incurring a loss on investment on any given day. Ex-post is the opposite of ex-ante, which means “before the event.”
Investors can use the ex-post data to get the actual performance of a security, without including any forecasts or projections that may be affected by market shocks. The ex-post value of a security can be obtained by deducting the price paid by investors from the current market price of the security.
The ex-post value of an asset can be calculated by taking the starting and ending values during a specific period, usually less than a year, and then taking into account the asset value growth or declines, as well as earned income from the asset. The beginning value is the market price of the asset at that time or the price that investors paid for the asset if the purchase occurred within the measurement period. The ending value is the current market price of the asset or the price that potential investors would pay to acquire the asset today.
The value obtained can then be used to analyze investment price fluctuations or earnings, and predict the expected returns of a security or investment. The ex-post value (actual returns based on historical returns) can then be compared to the predicted returns to determine the accuracy of the risk assessment methods used. For example, when measuring the returns of a security from October 1 to December 31, calculate the difference between the starting value on October 1 and the ending value on December 31.