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A Generalized Earnings-Based Stock Valuation Model

44 Pages Posted: 22 Nov 2004  

Ming Dong

York University - Schulich School of Business

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2004

Abstract

This paper provides a model for valuing stocks that takes into account the stochastic processes for earnings and interest rates. Our analysis differs from past research of this type in being applicable to stocks that have a positive probability of zero or negative earnings. By avoiding the singularity at the zero point, our earnings-based pricing model achieves improved pricing performance. The out-of-sample pricing performance of Generalized Earnings Valuation Model (GEVM) and the Bakshi and Chen (2001) pricing model are compared on four stocks and two indices. The generalized model has smaller pricing errors, and greater parameter stability. Furthermore, deviations between market and model prices tend to be mean-reverting using the GEVM model, suggesting that the model may be able to identify stock market misvaluation.

Keywords: Stock valuation, negative earnings, asset pricing

JEL Classification: G10, G12, G13

Suggested Citation

Dong, Ming and Hirshleifer, David A., A Generalized Earnings-Based Stock Valuation Model (November 15, 2004). Available at SSRN: https://ssrn.com/abstract=622541 or http://dx.doi.org/10.2139/ssrn.622541

Ming Dong (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 77945 (Phone)
416-736-5687 (Fax)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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