Loss of growth momentum doesn’t imply lower stock valuations

Dünya Executive - - FINANCIAL CORNER -

Do stock pr ces reflect fundamenta­l values, at least n some sense? Results depend on the preferred model spec f cat on. Let’s summar ze one such exerc se.

Real stock returns are calculated n the follow ng way: the BIST-100 monthly clos ng pr ces are d v ded by the CPI ndex n order to obta n a pr ce ndex mmune to nflat on and

the logar thm c d fference of th s ser es g ves us an ndex of real stock

returns.

The monthly ndustr al product on ndex, a proxy for real act v ty, has

been de-seasonal zed us ng the Tramo/Seats procedure and the f rst

logar thm c d fference of the deseasonal zed ser es gave us the rate of growth of the (de-seasonal zed)

ndustr al product on ndex.

The relevant f nanc al econom cs l terature suggests that such a result casts doubt on the relevance of DCF-based valuat ons f we st ck to the hor zon of one standard dev at on shocks, .e a few months. Otherw se, even ndustr al f rms’ stocks d verge...

The spec f cat on used s due to Blanchard & Quah (1989) and return shocks are constra ned not to have an mpact on real act v ty, n l ne w th the l terature. So, the argument cuts both ways. Impulse responses are n l ne w th other stud es’ f nd ngs and...

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