IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0312011.html
   My bibliography  Save this paper

Stock Market Valuation In The United States

Author

Listed:
  • Patrick BISCIARI

    (National bank of Belgium)

  • Alain DURRE

    (National bank of Belgium)

  • Alain NYSSENS

    (National bank of Belgium)

Abstract

This paper gives an overview of some issues related to market aluation, focusing on the developments on the New York equity markets. The 42.4 p.c. fall in the S&P 500 price index between 24 March 2000 - when it reached its all-time high - and 31 December 2002 is situated in a very long term perspective. It then appears that some bear markets were more pronounced in the past but that the bull market preceding the 2000-2002 bear market had been particularly long and impressive in extent. Given this sharp correction, we will discuss whether the S&P 500 was correctly valued at the end of 2002. To this e d, we make use of valuation indicators defined as the ratio of the price to a fundamental. The fundamentals considered here are, according to the discount dividend model, annual earnings and, according to Q-theory, net worth. In December 2002, price-earnings (P/E) still showed a significant overvaluation of equity prices when compared to the historical average over the 1871-2002 period but, since July 2002, the overvaluation has not been significant in the case of Q. The evidence is even more mixed when the comparison is made, for each valuation indicator, with their average over the last 10 years. Simulations based on VAR models for P/E and Q were carried out to check whether, on two occasions, the S&P 500 in real terms climbed to a level perceived as irrational given past experience, implying that a correction had to be expected. These occasions were the so-called 1929 and 2000 bubbles. The models showed that, at some point in time before the peak in (real) stock prices was reached, the real S&P 500 exceeded the upper band of the 95 p.c. confidence intervals during both periods. For each of them, the Q model showed earlier and more persistent signals of significant overvaluation of stock prices than for the P/E model. Finally, in December 2002, both models indicated that the stock price had come back largely within the confidence interval.

Suggested Citation

  • Patrick BISCIARI & Alain DURRE & Alain NYSSENS, 2003. "Stock Market Valuation In The United States," Finance 0312011, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0312011
    Note: Type of Document - pdf; prepared on winNT; to print on screen;
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0312/0312011.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martha Douvogiannis & Joel Lander & Athanasios Orphanides, "undated". "Earnings Forecasts and the Predictability of Stock Returns: Evidence from Trading the S&P;," Finance and Economics Discussion Series 1997-06, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    3. Jeanfils, P., 2000. "A Model with Explicit Expectations for Belgium," Papers 4, Warwick - Development Economics Research Centre.
    4. Eugene White & Frederic Mishkin, 2002. "U.S.Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," Departmental Working Papers 200208, Rutgers University, Department of Economics.
    5. Danny Cassimon & Peter-Jan Engelen & Hilde Meersman & Martine Van Wouwe, 2003. "Investment, uncertainty and irreversibility: evidence from Belgian accounting data," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 9, pages 194-226, Edward Elgar Publishing.
    6. Stephen J. Turnovsky, 2000. "Growth in an open economy: some recent developments," Working Paper Research 05, National Bank of Belgium.
    7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    8. Clements, Michael P & Hendry, David F, 1995. "Forecasting in Cointegration Systems," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 127-146, April-Jun.
    9. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    10. Ronald MacDonald, 2000. "The role of the exchange rate in economic growth: a euro-zone perspective," Working Paper Research 09, National Bank of Belgium.
    11. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    12. Jeanfils, P., 2001. "A Guided Tour of the World of Rational Expectations Models and Optimal Policies," Papers 16, Warwick - Development Economics Research Centre.
    13. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
    14. Kazuo Ogawa & Shin-Ichi Kitasaka, 1999. "Market Valuation and the q Theory of Investment," The Japanese Economic Review, Japanese Economic Association, vol. 50(2), pages 191-211, June.
    15. John Vickers, 2000. "Monetary union and economic growth," Working Paper Research 10, National Bank of Belgium.
    16. Mr. Paul R Masson, 2000. "Fiscal Policy and Growth in the Context of European Integration," IMF Working Papers 2000/133, International Monetary Fund.
    17. Ronald W. Anderson, 2002. "Capital structure, firm liquidity and growth," Working Paper Research 27, National Bank of Belgium.
    18. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    19. Patrick Bisciari, 2001. "Nouvelle économie," Working Paper Document 14, National Bank of Belgium.
    20. Paul Butzen & Catherine Fuss & Philip Vermeulen, 2002. "The impact of uncertainty on investment plans," Working Paper Research 24, National Bank of Belgium.
    21. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    22. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    23. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    24. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    25. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    26. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    27. Quentin Wibaut, 2000. "Politique monétaire et prix des actifs: le cas des Etats-Unis," Working Paper Document 11, National Bank of Belgium.
    28. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    29. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    30. Nathan S. Balke & Mark E. Wohar, 2001. "Explaining stock price movements: is there a case for fundamentals?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 22-34.
    31. repec:pri:cepsud:91malkiel is not listed on IDEAS
    32. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    33. Julian Franks & Colin Mayer, 2002. "Governance as a source of managerial discipline," Working Paper Research 31, National Bank of Belgium.
    34. Jean-Jacques Vanhaelen & Luc Dresse & Jan De Mulder, 2000. "The Belgian industrial confidence indicator: leading indicator of economic activity in the euro area ?," Working Paper Document 12, National Bank of Belgium.
    35. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 313-334, June.
    36. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105, Bank for International Settlements.
    37. William D. Nordhaus, 2002. "The Recent Recession, the Current Recovery, and Stock Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 199-228.
    38. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    39. repec:sae:niesru:v:167:y::i:1:p:86-105 is not listed on IDEAS
    40. Smets, Frank & Wouters, Raf, 2002. "An estimated stochastic dynamic general equilibrium model of the euro area," Working Paper Series 171, European Central Bank.
    41. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Working Paper Research 02, National Bank of Belgium.
    42. Michele Cincera, 2003. "Financing constraints, fixed capital and R&D investment decisions of Belgian firms," Chapters, in: Paul Butzen & Catherine Fuss (ed.), Firms’ Investment and Finance Decisions, chapter 6, pages 129-152, Edward Elgar Publishing.
    43. Ivo Maes, 2002. "On the origins of the Franco-German EMU controversies," Working Paper Research 34, National Bank of Belgium.
    44. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. A. Bruggeman & M. Hradisky & V. Périlleux, 2005. "Share prices, house prices and monetary policy," Economic Review, National Bank of Belgium, issue iii, pages 65-78, September.
    2. Patrick Bisciari & Alain Durré, 2005. "La bulle « Internet », un remake de la bulle de 1929 ?," Revue d'Économie Financière, Programme National Persée, vol. 81(4), pages 157-169.
    3. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.
    2. Luc Aucremann & David Cornille, 2001. "Attractive prices and euro-rounding effects on inflation," Working Paper Document 17, National Bank of Belgium.
    3. Menkhoff, Lukas, 2010. "The use of technical analysis by fund managers: International evidence," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2573-2586, November.
    4. Ivo Maes, 2002. "On the origins of the Franco-German EMU controversies," Working Paper Research 34, National Bank of Belgium.
    5. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, July.
    6. Nathan Jensen, 2007. "International institutions and market expectations: Stock price responses to the WTO ruling on the 2002 U.S. steel tariffs," The Review of International Organizations, Springer, vol. 2(3), pages 261-280, September.
    7. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    8. Kin-Boon Tang & Shao-Jye Wong & Shih-Kuei Lin & Szu-Lang Liao, 2020. "Excess volatility and market efficiency in government bond markets: the ASEAN-5 context," Journal of Asset Management, Palgrave Macmillan, vol. 21(2), pages 154-165, March.
    9. Imran Yousaf & Shoaib Ali & Syed Zulfiqar Ali Shah, 2018. "Herding behavior in Ramadan and financial crises: the case of the Pakistani stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-14, December.
    10. Roland Rothenstein, 2018. "Quantification of market efficiency based on informational-entropy," Papers 1812.02371, arXiv.org.
    11. Qianwei Ying & Tahir Yousaf & Qurat ul Ain & Yasmeen Akhtar & Muhammad Shahid Rasheed, 2019. "Stock Investment and Excess Returns: A Critical Review in the Light of the Efficient Market Hypothesis," JRFM, MDPI, vol. 12(2), pages 1-22, June.
    12. Mallory, Mindy L. & Irwin, Scott H. & Hayes, Dermot J., 2012. "How market efficiency and the theory of storage link corn and ethanol markets," Energy Economics, Elsevier, vol. 34(6), pages 2157-2166.
    13. Andrea Antico & Giulio Bottazzi & Daniele Giachini, 2022. "On the evolutionary stability of the sentiment investor," LEM Papers Series 2022/09, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    14. Baker, Mindy Lyn, 2009. "Three essays concerning agriculture and energy," ISU General Staff Papers 200901010800001849, Iowa State University, Department of Economics.
    15. Bernard Njindan Iyke, 2019. "A Test Of The Efficiency Of The Foreign Exchange Market In Indonesia," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 0(12th BMEB), pages 1-26, January.
    16. Andrew Phiri, 2022. "Changing efficiency of BRICS currency markets during the COVID-19 pandemic," Economic Change and Restructuring, Springer, vol. 55(3), pages 1673-1699, August.
    17. Ehnts, Dirk & Carrión Álvarez, Miguel, 2013. "The theory of reflexivity: A non-stochastic randomness theory for business schools only?," IPE Working Papers 28/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    18. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    19. Olivier Brandouy & Philippe Mathieu, 2006. "A Broad-Spectrum Computational Approach for Market Efficiency," Computing in Economics and Finance 2006 492, Society for Computational Economics.
    20. Ashok Chanabasangouda Patil & Shailesh Rastogi, 2019. "Time-Varying Price–Volume Relationship and Adaptive Market Efficiency: A Survey of the Empirical Literature," JRFM, MDPI, vol. 12(2), pages 1-18, June.

    More about this item

    Keywords

    financial markets; stock prices; stock market; usa; united states; econometrics; time-series models; forecast; forecasting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:wpa:wuwpfi:0312011. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.