A Generalized Earnings-Based Stock Valuation Model

Ming Dong and David Hirshleifer

Finance from University Library of Munich, Germany

Abstract: This paper provides a model for valuing stocks that takes into account the stochastic processes for earnings and interest rates. Our analysis differs from past research of this type in being applicable to stocks that have a positive probability of zero or negative earnings. By avoiding the singularity at the zero point, our earnings-based pricing model achieves improved pricing performance. The out-of-sample pricing performance of Generalized Earnings Valuation Model (GEVM) and the Bakshi and Chen (2001) pricing model are compared on four stocks and two indices. The generalized model has smaller pricing errors, and greater parameter stability. Furthermore, deviations between market and model prices tend to be mean-reverting using the GEVM model, suggesting that the model may be able to identify stock market misvaluation.

Keywords: Stock valuation; negative earnings; asset pricing (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2004-12-04
New Economics Papers: this item is included in nep-fin
Note: Type of Document - pdf; pages: 44
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https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0412/0412008.pdf (application/pdf)

Related works:
Journal Article: A GENERALIZED EARNINGS‐BASED STOCK VALUATION MODEL (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0412008

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