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A Generalized Earnings Model of Stock Valuation

37 Pages Posted: 18 Jul 1998  

Andrew Ang

BlackRock, Inc

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Date Written: May 14, 1998

Abstract

Traditional approaches to valuing equities have largely focused on the Dividend Discount Model. It may be hard to reliably estimate dividend processes in small samples and market participants focus primarily on earnings and other accounting information in analyzing stocks. For these reasons we try to value stocks using earnings and book value. Building on the seminal work of Miller and Modigliani (1961) and Ohlson (1990, 1995) we develop a Generalized Earnings Model of stock valuation which uses earnings and book values. This is a general no-arbitrage model which uses stochastic pricing kernels. The model can be implemented by assuming the driving variables follow affine processes which allows tractable calculations. We apply the model to several individual stocks.

JEL Classification: C51, G12, M41

Suggested Citation

Ang, Andrew and Liu, Jun, A Generalized Earnings Model of Stock Valuation (May 14, 1998). Available at SSRN: https://ssrn.com/abstract=94028 or http://dx.doi.org/10.2139/ssrn.94028

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)

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