Long-Run Implied Market Fundamentals: An Exploration

26 Pages Posted: 12 Dec 2019

See all articles by Heinz Zimmermann

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance

Date Written: December 9, 2019

Abstract

The paper studies the volatility and correlation pattern of the fundamental valuation parameters (growth rate and its determinants, discount rate) calculated from widely used valuation ratios using the Gordon formula and relate them to some well-known results from the asset pricing literature. Our results reveal a substantially different picture of the volatility and cyclicality of the implied valuation parameters compared to estimates from econometric models using historical returns. We argue, in the spirit of Campbell (2008), that implied Gordon parameters can be interpreted as empirical proxies for conditional steady-state market fundamentals, which is supported by our findings.

Keywords: Stock market valuation, multiples, Gordon model

JEL Classification: G12, G32, E44

Suggested Citation

Zimmermann, Heinz, Long-Run Implied Market Fundamentals: An Exploration (December 9, 2019). Available at SSRN: https://ssrn.com/abstract=3501099 or http://dx.doi.org/10.2139/ssrn.3501099

Heinz Zimmermann (Contact Author)

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

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