IDEAS home Printed from https://ideas.repec.org/a/fip/fedmqr/y2000ifallp20-40nv.24no.4.html
   My bibliography  Save this article

Is the stock market overvalued?

Author

Listed:
  • Ellen R. McGrattan
  • Edward C. Prescott

Abstract

The value of U.S. corporate equity in the first half of 2000 was close to 1.8 times U.S. gross national product (GNP). Some stock market analysts have argued that the market is overvalued at this level. We use a growth model with an explicit corporate sector and find that the market is correctly valued. In theory, the market value of equity plus debt liabilities should equal the value of productive assets plus debt assets. Since the net value of debt is currently low, the market value of equity should be approximately equal to the market value of productive assets. We find that the market value of productive assets, including both tangible and intangible assets and assets used outside the country by U.S. subsidiaries, is currently about 1.8 times GNP, the same as the market value of equity.

Suggested Citation

  • Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  • Handle: RePEc:fip:fedmqr:y:2000:i:fall:p:20-40:n:v.24no.4
    as

    Download full text from publisher

    File URL: http://minneapolisfed.org/research/qr/qr2442.html
    Download Restriction: no

    File URL: http://minneapolisfed.org/research/qr/qr2442.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
    3. George M. Constantinides & John B. Donaldson & Rajnish Mehra, 2002. "Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 269-296.
    4. Mordecai Kurz & Andrea Beltratti, "undated". "The Equity Premium is No Puzzle," Working Papers 96004, Stanford University, Department of Economics.
    5. Annette Vissing-Jorgensen, 2000. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," Econometric Society World Congress 2000 Contributed Papers 1102, Econometric Society.
    6. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    7. Cochrane, John H, 1991. " Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations," Journal of Finance, American Finance Association, vol. 46(1), pages 209-237, March.
    8. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
    9. John H. Cochrane, 1988. "Production Based Asset Pricing," NBER Working Papers 2776, National Bureau of Economic Research, Inc.
    10. repec:cdl:ucsbec:21-98 is not listed on IDEAS
    11. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Stock market;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

    Statistics

    Access and download statistics

    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:fip:fedmqr:y:2000:i:fall:p:20-40:n:v.24no.4. 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: (Jannelle Ruswick). General contact details of provider: http://edirc.repec.org/data/frbmnus.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.