IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v4y2016i4p21-d80957.html
   My bibliography  Save this article

The Valuation of Equities and the GDP Growth Effect: A Global Empirical Study

Author

Listed:
  • Sebastián A. Rey

    (Centro de Investigación en Métodos Cuantitativos Aplicados a la Economía y la Gestión, Facultad de Ciencias Económicas, Universidad de Buenos Aires, Av. Córdoba 2122 (C1120AAQ), Ciudad de Buenos Aires, Argentina
    Sebastián A. Rey is professor at Universidad de los Andes, Chile)

Abstract

One of the main characteristics of the (recently proposed) non-arbitrage valuation of equities framework is the reduction in pricing subjectivity. This is evidenced in terms of the dividends discount rate and the outlook of future performance (dividends projection) of the company that is being valued. Under this framework, as in the case of derivatives pricing, the discount rate is the risk-free interest rate (not the cost of equity), and the subjectively-determined drift of the stochastic process that drives the operating profits of the company is eliminated. The challenge that emerges is that the structure of the new drift of the operating profits process is undetermined under the methodology (this is a similar feature that is observed in the case of derivatives related to non-tradable assets). This paper proposes that the structure of this new drift is represented by the (country-specific) GDP nominal growth effect. This proposition is tested through an empirical study that involves several companies of 10 equity indices worldwide, for two different periods (1995–2004 and 2005–2014). The results of the test are reasonably successful, meaning that further research related to the framework could provide useful information for the understanding of financial assets and their links to the macro-economy.

Suggested Citation

  • Sebastián A. Rey, 2016. "The Valuation of Equities and the GDP Growth Effect: A Global Empirical Study," IJFS, MDPI, vol. 4(4), pages 1-18, October.
    • Handle: RePEc:gam:jijfss:v:4:y:2016:i:4:p:21-:d:80957
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/4/4/21/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7072/4/4/21/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    3. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    4. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-475, July.
    5. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    7. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    8. Sebastián A. Rey, 2015. "Non-arbitrage valuation of equities," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 4(3/4), pages 231-245.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:dau:papers:123456789/5374 is not listed on IDEAS
    2. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    3. Ana Belén Alonso-Conde & Javier Rojo-Suárez, 2020. "Nuclear Hazard and Asset Prices: Implications of Nuclear Disasters in the Cross-Sectional Behavior of Stock Returns," Sustainability, MDPI, vol. 12(22), pages 1-24, November.
    4. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    5. Javier Rojo‐Suárez & Ana Belén Alonso‐Conde & Ricardo Ferrero‐Pozo, 2022. "Liquidity, time‐varying betas and anomalies: Is the high trading activity enhancing the validity of the CAPM in the UK equity market?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 45-60, January.
    6. Javier Rojo-Suárez & Ana Belén Alonso-Conde, 2020. "Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models," PLOS ONE, Public Library of Science, vol. 15(11), pages 1-31, November.
    7. Munk, Claus, 2015. "Financial Asset Pricing Theory," OUP Catalogue, Oxford University Press, number 9780198716457.
    8. Keith A. Lewis, 2019. "A Simple Proof of the Fundamental Theorem of Asset Pricing," Papers 1912.01091, arXiv.org.
    9. Dilip B. Madan & Wim Schoutens & King Wang, 2020. "Bilateral multiple gamma returns: Their risks and rewards," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-27, March.
    10. Ibáñez, Alfredo, 2008. "Factorization of European and American option prices under complete and incomplete markets," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 311-325, February.
    11. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    12. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    13. repec:wyi:journl:002108 is not listed on IDEAS
    14. Patrick Gagliardini & Elisa Ossola & Olivier Scaillet, 2016. "Time‐Varying Risk Premium in Large Cross‐Sectional Equity Data Sets," Econometrica, Econometric Society, vol. 84, pages 985-1046, May.
    15. Peter Carr & Dilip Madan, 2012. "Factor Models for Option Pricing," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(4), pages 319-329, November.
    16. Maria Arduca & Cosimo Munari, 2020. "Fundamental theorem of asset pricing with acceptable risk in markets with frictions," Papers 2012.08351, arXiv.org, revised Apr 2022.
    17. Bizid, Abdelhamid & Jouini, Elyès, 2005. "Equilibrium Pricing in Incomplete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(4), pages 833-848, December.
    18. Astrid Eisenberg & Markus Rudolf, 2007. "Exchange Rates and the Conversion of Currency‐Specific Risk Premia," European Financial Management, European Financial Management Association, vol. 13(4), pages 672-701, September.
    19. Liu, Ludan, 2008. "It takes a model to beat a model: Volatility bounds," Journal of Empirical Finance, Elsevier, vol. 15(1), pages 80-110, January.
    20. Scholes, Myron S, 1998. "Derivatives in a Dynamic Environment," American Economic Review, American Economic Association, vol. 88(3), pages 350-370, June.
    21. Kirby, Chris, 1998. "The Restrictions on Predictability Implied by Rational Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 343-382.
    22. Sonntag, Dominik, 2018. "Die Theorie der fairen geometrischen Rendite [The Theory of Fair Geometric Returns]," MPRA Paper 87082, University Library of Munich, Germany.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:4:y:2016:i:4:p:21-:d:80957. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.