Will the valuation ratios revert to their historical means? Some evidence from breakpoint tests

John Carlson (), Eduard A. Pelz and Mark Wohar ()

No 113, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: If valuation ratios return to their historical means any time soon, then equity prices must fall substantially, or earnings and dividends must accelerate sharply, or some combination of these events must occur. Historical patterns over the past century suggest that stock prices will fall to align valuation ratios with their means. Of course, the means of the valuation ratios could have changed. To assess the likelihood of such changes, the authors employ breakpoint tests, which allow for multiple breakpoints at unknown break dates. The authors also review alternative explanations for changes in the ratios. They conclude that although no single explanation may be convincing by itself, taken in toto with empirical evidence of structural change, the preponderance of evidence suggests that the mean of the dividend-price ratio is now somewhere between 1% and 2%, probably nearer to 1%. They also conclude that the mean price-to-earnings ratio is now somewhere between 20 and 25, perhaps even higher.

Keywords: Stock; -; Prices (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:0113

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DOI: 10.26509/frbc-wp-200113

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