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: 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
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