Expected P/E, Residual P/E, and Stock Return Reversal: Time-Varying Fundamentals or Investor Overreaction?
We decompose P/E ratios into a fundamental component and a residual component that cannot be explained by the firm or economic fundamentals. Purging the fundamental component from observed P/E ratios, we find that portfolios based on residual P/E ratios exhibit performance reversal only in overbid glamour stocks; hence over-optimism is more prevalent than over-pessimism.
Volume (Year): 6 (2007)
Issue (Month): 1 (April)
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"Mean Reversion in Stock Prices: Evidence and Implications,"
NBER Working Papers
2343, National Bureau of Economic Research, Inc.
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