A Generalized Earnings-Based Stock Valuation Model
AbstractThis paper provides a model for valuing stocks that takes into account the stochastic processes for earnings and interest rates. Our analysis differs from past research of this type in being applicable to stocks that have a positive probability of zero or negative earnings. By avoiding the singularity at the zero point, our earnings-based pricing model achieves improved pricing performance. The out-of-sample pricing performance of the generalized earnings valuation model (GEVM) and the Bakshi and Chen pricing model are compared on four stocks and two indices. The generalized model has smaller pricing errors and greater parameter stability. Furthermore, deviations between market and model prices tend to be mean-reverting using the GEVM model, suggesting that the model may be able to identify stock market misvaluation. Copyright Blackwell Publishing Ltd and The University of Manchester, 2005.
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Bibliographic InfoArticle provided by University of Manchester in its journal The Manchester School.
Volume (Year): 73 (2005)
Issue (Month): s1 (09)
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Other versions of this item:
- Ming Dong & David Hirshleifer, 2004. "A Generalized Earnings-Based Stock Valuation Model," Finance 0412008, EconWPA.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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