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Are share prices still too high?

  • McMillan, David G.
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    The current value of the dividend yield is at a historically low level. Since the end of the bear market in 2003 prices have rebounded strongly such that this yield is at a lower point than any previous in its history except at the height of the late 1990s bubble. The price-earnings ratio paints a similar picture and raises the issues of equity overvaluation and price falls. This paper resolves to examine whether prices are over-valued by arguing that such measures do not have a single attractor point and hence relying on historical means as a guide to mis-valuation is not a valid approach. In explaining why the higher equity prices relative to dividends are supported we provide evidence consistent with existing arguments that low and stable inflation is a particular driver to better equity valuation and note that the last decade has seen a period of historically low and stable inflation. Hence, the stable economic environment has led to more accurate valuation of stocks and lower required rates of return, thus supporting higher prices.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0275-5319(08)00044-5
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    Article provided by Elsevier in its journal Research in International Business and Finance.

    Volume (Year): 23 (2009)
    Issue (Month): 3 (September)
    Pages: 223-232

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    Handle: RePEc:eee:riibaf:v:23:y:2009:i:3:p:223-232
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