Assessing the Risks of Asset Overvaluation: Models and Challenges

40 Pages Posted: 8 May 2017

Date Written: May 3, 2017

Abstract

We propose methods to compute confidence bands for the fundamental values of stocks and corporate bonds. These methods take into account uncertainty about future cash flows and about the discount factors used to discount the cash flows. We use them to assess the current degree of under-/over-valuation of asset prices. We find no evidence of over-valuation of the stocks and corporate bonds of the major economies.

Keywords: stock risk premium, bond risk premium, fundamental value, under-/over-valuation

JEL Classification: B26, C02

Suggested Citation

Cecchetti, Sara and Taboga, Marco, Assessing the Risks of Asset Overvaluation: Models and Challenges (May 3, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1114, Available at SSRN: https://ssrn.com/abstract=2964851 or http://dx.doi.org/10.2139/ssrn.2964851

Sara Cecchetti (Contact Author)

Bank of Italy

Via Nazionale 91
Rome, 00184
Italy

Marco Taboga

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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