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What is the Intrinsic Value of the Dow?

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Author Info
Charles M. C. Lee (Johnson Graduate School of Management, Cornell University,)
James Myers (University of Washington)
Bhaskaran Swaminathan (Johnson Graduate School of Management, Cornell University,)

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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. Copyright The American Finance Association 1999.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 54 (1999)
Issue (Month): 5 (October)
Pages: 1693-1741
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Handle: RePEc:bla:jfinan:v:54:y:1999:i:5:p:1693-1741

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