Patrick Bisciari () (National Bank of Belgium, Research Department) Alain Durré () (National Bank of Belgium, Research Department) Alain Nyssens (National Bank of Belgium, Research Department)
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This paper gives an overview of some issues related to market valuation, focusing on the developments on the New York equity markets. The 42.4 p.c. fall in the S&P 500 price index between 24 March 2000 - when it reached its all-time high - and 31 December 2002 is situated in a very long term perspective. It then appears that some bear markets were more pronounced in the past but that the bull market preceding the 2000-2002 bear market had been particularly long and impressive in extent. Given this sharp correction, we will discuss whether the S&P 500 was correctly valued at the end of 2002. To this end, we make use of valuation indicators defined as the ratio of the price to a fundamental. The fundamentals considered here are, according to the discount dividend model, annual earnings and, according to Q-theory, net worth. In December 2002, price-earnings (P/E) still showed a significant overvaluation of equity prices when compared to the historical average over the 1871-2002 period but, since July 2002, the overvaluation has not been significant in the case of Q. The evidence is even more mixed when the comparison is made, for each valuation indicator, with their average over the last 10 years. Simulations based on VAR models for P/E and Q were carried out to check whether, on two occasions, the S&P 500 in real terms climbed to a level perceived as irrational given past experience, implying that a correction had to be expected. These occasions were the so-called 1929 and 2000 bubbles. The models showed that, at some point in time before the peak in (real) stock prices was reached, the real S&P 500 exceeded the upper band of the 95 p.c. confidence intervals during both periods. For each of them, the Q model showed earlier and more persistent signals of significant overvaluation of stock prices than for the P/E model. Finally, in December 2002, both models indicated that the stock price had come back largely within the confidence interval.
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Paper provided by National Bank of Belgium in its series Documents series with number
200311.
Find related papers by JEL classification: G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003.
"Inflation, relative prices and nominal rigidities,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105
Bank for International Settlements.
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