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What is the Intrinsic Value of the Dow?

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  • Charles M. C. Lee
  • James Myers
  • Bhaskaran Swaminathan

Abstract

We model the time‐series relation between price and intrinsic value as a cointegrated system, so that price and value are long‐term convergent. In this framework, we compare the performance of alternative estimates of intrinsic value for the Dow 30 stocks. During 1963–1996, traditional market multiples (e.g., B/P, E/P, and D/P ratios) have little predictive power. However, a V/P ratio, where V is based on a residual income valuation model, has statistically reliable predictive power. Further analysis shows time‐varying interest rates and analyst forecasts are important to the success of V. Alternative forecast horizons and risk premia are less important.

Suggested Citation

  • Charles M. C. Lee & James Myers & Bhaskaran Swaminathan, 1999. "What is the Intrinsic Value of the Dow?," Journal of Finance, American Finance Association, vol. 54(5), pages 1693-1741, October.
    • Handle: RePEc:bla:jfinan:v:54:y:1999:i:5:p:1693-1741
    DOI: 10.1111/0022-1082.00164
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