What is the Intrinsic Value of the Dow?

Posted: 24 Apr 1999

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Bhaskaran Swaminathan

LSV Asset Management

Multiple version iconThere are 2 versions of this paper

Abstract

We model the time-series relation between price and intrinsic value as a cointegrated system, so that price and value are long-term convergent. In this framework, we compare the performance of alternative estimates of intrinsic value for the Dow 30 stocks. During 1963-96, traditional market multiples (e.g., B/P, E/P, and D/P ratios) had little predictive power. However, a V/P ratio, where "V" is based on a residual income valuation model, has statistically reliable predictive power. Further analysis shows time-varying interest rates and analyst forecasts are important to the success of V. Alternative forecast horizons and risk premia are less important.

JEL Classification: G12, G14

Suggested Citation

Lee, Charles M.C. and Myers, James N. and Swaminathan, Bhaskaran, What is the Intrinsic Value of the Dow?. Available at SSRN: https://ssrn.com/abstract=160331

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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