The persistence of the small firm/January effect: Is it consistent with investors' learning and arbitrage efforts?
Accounting and Finance
Monte Carlo simulation is a powerful spreadsheet-based tool that allows managers to better understand and visualize risk and uncertainty in discounted cash flow (DCF) analysis. The primary output, a histogram of net present values (NPV), maps the entire distribution of possible outcomes as a bell-shaped curve and therefore estimates the probability of success for the project (e.g., NPV > zero). Although we use fictional names, we illustrate a real capital budgeting problem using Monte Carlo simulation to demonstrate how employing this tool can result in more-informed decision making.
Easterday, K. E., Sen, P. K., & Stephan, J. A. (2009). The persistence of the small firm/January effect: Is it consistent with investors' learning and arbitrage efforts? Quarterly Review of Economics and Finance, 49(3), 1172–1193. doi:10.1016/j.qref.2008.07.001