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Article: Stock valuation in dynamic economies

TitleStock valuation in dynamic economies
Authors
KeywordsStock valuation
Earnings growth
Equilibrium price/earnings ratios
Issue Date2005
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/finmar
Citation
Journal of Financial Markets, 2005, v. 8 n. 2, p. 111-151 How to Cite?
AbstractThis article develops and empirically implements a stock valuation model. The model makes three assumptions: (i) dividend equals a fixed fraction of net earnings-per-share plus noise, (ii) the economy's pricing kernel is consistent with the Vasicek term structure of interest rates, and (iii) the expected earnings growth rate follows a mean-reverting stochastic process. The resulting stock valuation formula has three variables as input: net earnings-per-share, expected earnings growth, and interest rate. Using a sample of stocks, our empirical exercise shows that the derived valuation formula produces significantly lower pricing errors than existing models, both in- and out-of-sample. Modeling earnings growth dynamics properly is the most crucial for achieving better performance, while modeling the discounting dynamics properly also makes a significant difference.
Persistent Identifierhttp://hdl.handle.net/10722/222280
ISSN
2015 Impact Factor: 1.726
2015 SCImago Journal Rankings: 3.233
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorBakshi, G-
dc.contributor.authorChen, Z-
dc.date.accessioned2016-01-11T04:13:43Z-
dc.date.available2016-01-11T04:13:43Z-
dc.date.issued2005-
dc.identifier.citationJournal of Financial Markets, 2005, v. 8 n. 2, p. 111-151-
dc.identifier.issn1386-4181-
dc.identifier.urihttp://hdl.handle.net/10722/222280-
dc.description.abstractThis article develops and empirically implements a stock valuation model. The model makes three assumptions: (i) dividend equals a fixed fraction of net earnings-per-share plus noise, (ii) the economy's pricing kernel is consistent with the Vasicek term structure of interest rates, and (iii) the expected earnings growth rate follows a mean-reverting stochastic process. The resulting stock valuation formula has three variables as input: net earnings-per-share, expected earnings growth, and interest rate. Using a sample of stocks, our empirical exercise shows that the derived valuation formula produces significantly lower pricing errors than existing models, both in- and out-of-sample. Modeling earnings growth dynamics properly is the most crucial for achieving better performance, while modeling the discounting dynamics properly also makes a significant difference.-
dc.languageeng-
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/finmar-
dc.relation.ispartofJournal of Financial Markets-
dc.rights© <year>. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/-
dc.subjectStock valuation-
dc.subjectEarnings growth-
dc.subjectEquilibrium price/earnings ratios-
dc.titleStock valuation in dynamic economies-
dc.typeArticle-
dc.identifier.emailChen, Z: zchen99@hku.hk-
dc.identifier.authorityChen, Z=rp02041-
dc.identifier.doi10.1016/j.finmar.2005.01.001-
dc.identifier.scopuseid_2-s2.0-17544362638-
dc.identifier.volume8-
dc.identifier.issue2-
dc.identifier.spage111-
dc.identifier.epage151-
dc.identifier.isiWOS:000229162500001-
dc.publisher.placeNetherlands-

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