What is the Intrinsic Value of the Dow?
Article first published online: 17 DEC 2002
The American Finance Association 1999
The Journal of Finance
Volume 54, Issue 5, pages 1693–1741, October 1999
How to Cite
Lee, C. M. C., Myers, J. and Swaminathan, B. (1999), What is the Intrinsic Value of the Dow?. The Journal of Finance, 54: 1693–1741. doi: 10.1111/0022-1082.00164
- Issue published online: 17 DEC 2002
- Article first published online: 17 DEC 2002
- Cited By
We model the time-series relation between price and intrinsic value as a cointegrated system, so that price and value are long-term convergent. In this framework, we compare the performance of alternative estimates of intrinsic value for the Dow 30 stocks. During 1963–1996, traditional market multiples (e.g., B/P, E/P, and D/P ratios) have little predictive power. However, a V/P ratio, where V is based on a residual income valuation model, has statistically reliable predictive power. Further analysis shows time-varying interest rates and analyst forecasts are important to the success of V. Alternative forecast horizons and risk premia are less important.