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A new approach to estimating value–income ratios with income growth and time-varying yields

Peijie Wang and Steven Brand

European Journal of Operational Research, 2015, vol. 242, issue 1, 182-187

Abstract: Value–income ratios, such as dividend yields in finance and price–rent ratios in housing and real estate markets, impact society in a variety of ways. This paper proposes a new type of the present value model that features income growth with time-varying yields. It offers a new risk perspective, which may alleviate timid investor behavior in market downturns while cooling down the market in seemingly booming times. A binding relationship, the value–income ratio adjusted by yields of the asset and growth in income, is revealed. This has notable implications for empirical research, which examines value–income ratios time and again. Incorrectly perceived market behavior distorts the formation of investor behavior, and vice versa, which has serious consequences to the functioning of the market and beyond.

Keywords: Value–income ratio; Time-varying yield; Income growth; Present value model (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.ejor.2014.09.046

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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Handle: RePEc:eee:ejores:v:242:y:2015:i:1:p:182-187