Discovering Fundamental Value

62 Pages Posted: 10 Nov 2019

See all articles by Evan Dudley

Evan Dudley

Queen's University - Smith School of Business

Saad Khan

Queen's University - Smith School of Business

Luke Phelps

Queen's University - Smith School of Business

Ryan Riordan

Queen's University - Smith School of Business

Date Written: October 16, 2019

Abstract

Using machine learning methods we identify the fundamental value and noise components of quarterly stock prices. We show that 28% of stock price variation is attributable to noise, and that 40% of noise is attributable to mutual fund trading. We find spikes in noise around the dot-com bubble, the 2008 financial crisis, and the European sovereign-debt crisis. Noise is higher for small firms and firms with high R&D expenditures. In an application of our methodology, we show that corporate managers do not have private information about future changes in fundamental value nor can they identify noise in prices.

Keywords: Machine Learning, Fundamental Value, Noise

JEL Classification: G20, G14, L10

Suggested Citation

Dudley, Evan and Khan, Saad and Phelps, Luke and Riordan, Ryan, Discovering Fundamental Value (October 16, 2019). Available at SSRN: https://ssrn.com/abstract=3470974 or http://dx.doi.org/10.2139/ssrn.3470974

Evan Dudley

Queen's University - Smith School of Business ( email )

Goodes Hall
Kingston, Ontario K7L 3N6
Canada

Saad Khan

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

HOME PAGE: http://www.saadalikhan.com/

Luke Phelps

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Ryan Riordan (Contact Author)

Queen's University - Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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