Managing funds in the US market: how to distinguish between transitory distortions and structural changes in the stock prices?
The paper reports estimates of a reliable fundamental value of the S&P index, standing for a long run target value in Error-Correction Modelling of the dynamics of subsequent returns. The Present Value Model suggests two fundamentals: dividends and a discount rate factor, specified as a risk free rate plus an ex ante risk premium, to capture structural breaks in the expectations. The dates of the shifts are identified by estimating recursively a cointegration relationship. Monte Carlo simulations are used to compute appropriate statistics for stationarity tests. The predictive performance of the Error-Correcting Model is then used to implement winning portfolio-investment strategies.
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Volume (Year): 6 (2000)
Issue (Month): 2 ()
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