A Generalized Earnings Model of Stock Valuation
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
University of California, San Diego (UCSD) - Rady School of Management
May 14, 1998
Traditional approaches to valuing equities have largely focused on the Dividend Discount Model. It may be hard to reliably estimate dividend processes in small samples and market participants focus primarily on earnings and other accounting information in analyzing stocks. For these reasons we try to value stocks using earnings and book value. Building on the seminal work of Miller and Modigliani (1961) and Ohlson (1990, 1995) we develop a Generalized Earnings Model of stock valuation which uses earnings and book values. This is a general no-arbitrage model which uses stochastic pricing kernels. The model can be implemented by assuming the driving variables follow affine processes which allows tractable calculations. We apply the model to several individual stocks.
Number of Pages in PDF File: 37
JEL Classification: C51, G12, M41working papers series
Date posted: July 18, 1998
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