A Generalized Earnings-Based Stock Valuation Model
This 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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 73 (2005)
Issue (Month): s1 (09)
|Contact details of provider:|| Postal: Manchester M13 9PL|
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1463-6786
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=1463-6786|
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.:
- MING DONG & David Hirshleifer & SCOTT RICHARSON & Siew Hong Teoh, 2004.
"Does Investor Misvaluation Drive the Takeover Market?,"
- Ming Dong & David Hirshleifer & Scott Richardson & Siew Hong Teoh, 2006. "Does Investor Misvaluation Drive the Takeover Market?," Journal of Finance, American Finance Association, vol. 61(2), pages 725-762, 04.
- Zhiwu Chen & Ming Dong, 2001.
"Stock Valuation and Investment Strategies,"
Yale School of Management Working Papers
ysm212, Yale School of Management, revised 01 Oct 2001.
- David Hirshleifer, 2001.
"Investor Psychology and Asset Pricing,"
Journal of Finance,
American Finance Association, vol. 56(4), pages 1533-1597, 08.
- Jonathan B. Berk & Richard C. Green & Vasant Naik, 1999.
"Optimal Investment, Growth Options, and Security Returns,"
Journal of Finance,
American Finance Association, vol. 54(5), pages 1553-1607, October.
- Jonathan Berk & Richard C. Green & Vasant Naik, 1998. "Optimal Investment, Growth Options, and Security Returns," NBER Working Papers 6627, National Bureau of Economic Research, Inc.
- Jonathan Berk & Richard C. Green & Vasant Naik, "undated". "Optimal Investment, Growth Options and Security Returns," GSIA Working Papers 64, Carnegie Mellon University, Tepper School of Business.
- Zhiwu Chen & Jan Jindra, 2001. "A Valuation Study of Stock-Market Seasonality and Firm Size," Yale School of Management Working Papers ysm199, Yale School of Management.
- Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
- Brennan, Michael J. & Schwartz, Eduardo S., 1979. "A continuous time approach to the pricing of bonds," Journal of Banking & Finance, Elsevier, vol. 3(2), pages 133-155, July.
- Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers 85, University of California at Berkeley.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985.
"A Theory of the Term Structure of Interest Rates,"
Econometric Society, vol. 53(2), pages 385-407, March.
- Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-1282, September.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
- Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
When requesting a correction, please mention this item's handle: RePEc:bla:manchs:v:73:y:2005:i:s1:p:1-31. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.