A statistical investigation of a stock valuation model

Wilton Bernardino (), João B. Amaral (), Nelson L. Paes (), Raydonal Ospina () and José L. Távora ()
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Wilton Bernardino: Universidade Federal de Pernambuco, Cidade Universitária
João B. Amaral: Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária
Nelson L. Paes: Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária
Raydonal Ospina: Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária
José L. Távora: Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária

SN Business & Economics, 2022, vol. 2, issue 8, 1-25

Abstract: Abstract The Federal Reserve (FED) model is an empirical approach commonly used for valuation of the stock market. The model compares the earnings yield of the stock market with the nominal yield of long-term government bonds. This work investigates the validity of the FED model using Brazilian financial data. To achieve our goal, we utilized an empirical model called Vector Error Correction model (VECM), that allows to investigate the hypothesis of cointegration and causality aspects between the variables. The main results indicate the existence of favorable evidence to the long run relationship between the yields in Brazil. Also, in Brazil, there is a clear causality effect from the fixed income yields to the stock market ones.

Keywords: Brazilian economy; Cointegration analysis; FED model; timing market model; Stock market; Fixed income; Vector error correction model (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s43546-022-00270-x

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