Which Component of Treasury Yields Belongs in Equity Valuation Models? An Application to the S&P 500

"Which Component of Treasury Yields Belongs in Equity Valuation Models? An Application to the S&P 500," The Journal of Portfolio Management Summer 2013, 39 (4) 80-90; DOI:10.3905/jpm.2013.39.4.080

Posted: 19 Jun 2019

Date Written: 2013

Abstract

Given a relaxation of the expectations hypothesis of interest rates and an estimate of the term premium, the remaining assumption that anticipated distant-horizon nominal expected short rates and projected earnings growth are equivalent implies novel cash-flow-based valuation models for shares. For example, an application of a simple dividend-discount framework to the S&P 500, under 600 alternative specifications (to avoid data mining), using a sample from January 1987 through January 2012, fits the data well. It suggests that the model errors correct; it also suggests the argument that estimated forward Treasury term premiums, not yields, belong in the discount factor.

Suggested Citation

Durham, J. Benson, Which Component of Treasury Yields Belongs in Equity Valuation Models? An Application to the S&P 500 (2013). "Which Component of Treasury Yields Belongs in Equity Valuation Models? An Application to the S&P 500," The Journal of Portfolio Management Summer 2013, 39 (4) 80-90; DOI:10.3905/jpm.2013.39.4.080. Available at SSRN: https://ssrn.com/abstract=3402626

J. Benson Durham (Contact Author)

Cornerstone Macro LLC ( email )

1330 Sixth Avenue, 5th Floor
New York, NY 10019
United States

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