A New Valuation Measure for the Stock Market

Code

• github.com/asarantsev/BayesianLT
  OfficialIn papernone★ 0

Abstract

We propose a new valuation measure for the American stock market. We split total returns into three components: earnings growth, dividend yield, and valuation change. The first two components are fundamental, the third is speculative. We treat earnings growth as exogenous. Combining the other two components gives us a new valuation measure, which fits autoregression of order 1 with Gaussian innovations, centered at 4.6%. Therefore, long-term total returns equals long-term earnings growth plus 4.6%. We confirm the classic 4% withdrawal rule. A retiree should invest in stocks and withdraw 4% of initial wealth after adjusting for inflation.

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Reproductions