What is the Intrinsic Value of the Dow?

Posted: 24 Apr 1999

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Bhaskaran Swaminathan

LSV Asset Management

Multiple version iconThere are 2 versions of this paper

Abstract

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 1963-96, traditional market multiples (e.g., B/P, E/P, and D/P ratios) had 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.

JEL Classification: G12, G14

Suggested Citation

Lee, Charles M.C. and Myers, James N. and Swaminathan, Bhaskaran, What is the Intrinsic Value of the Dow?. Journal of Finance, Vol. 54, No. 5, October 1999. Available at SSRN: https://ssrn.com/abstract=160331

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,361
PlumX Metrics