Analysis of Internal and External Factors of the Business Affecting the FED Stock Valuation Model : An Application in Borsa Istanbul

The FED model is a modern equity valuation method that calculates the fair value of equities by establishing a relationship between benchmark government bond yields and earnings/price ratios. According to the FED model, the stock is overvalued above its fair value if earnings/price ratios are lower than the 10-year government bond yield. Conversely, the stock is priced below its fair value. If we interpret this judgment in terms of the price/earnings ratio, there is overvaluation if the price/earnings ratio is higher than bond yields. If it is lower, there is undervaluation. This study aims to investigate the validity of the FED model for Turkey and to analyze the internal and external factors affecting under and overpricing that deviate from the fair value implied by the FED model. As a result of the literature review, the 5 BIST (Borsa Istanbul) companies with the highest market capitalization as of March 16 between 2021Q3-2023Q4 at quarterly frequency were selected for analysis. The most successful models in the research are artificial neural network models; the effects of variables are evaluated by robust panel regression, and the validity of the FED model for Turkey is assessed with the help of the Johansen co-integration test. According to the co-integration results, the FED model is valid for BIST-100. These results indicate that the FED model is valid for Turkey in the short and long run. When the FED model is applied to Turkey, the artificial neural network model error metrics indicate that the use of 10-year government bond rates in the model yields more significant results than the use of 2-year government bond rates, as in the US case. On the other hand, among the factors explaining the deviations from fair value in the FED model, the results of external factors are more significant. When modeled with external factors, internal factors yield more significant results. The contributions of the research to the literature can be listed as proving that the FED model is valid for Turkey, analyzing the FED model at the enterprise level, and analyzing benchmark government bond yields of different maturities within the scope of the FED model.