A New Stock Market Valuation Measure with Applications to Retirement Planning
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arXiv
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| Format: | Preprint |
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2019
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| _version_ | 1866915192796872704 |
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| author | Sarantsev, Andrey |
| author_facet | Sarantsev, Andrey |
| contents | We generalize the classic Shiller cyclically adjusted price-earnings ratio (CAPE) used for prediction of future total returns of the stock market. We treat earnings growth as exogenous. The difference between log wealth and log earnings is modeled as an autoregression of order 1 with linear trend 4.6% and Gaussian innovations. Detrending gives us a new valuation measure. Our results disprove the Efficient Market Hypothesis. Therefore, long-run total returns equal long-run earnings growth plus 4.6%. We apply results to retirement planning. A withdrawal process governs how a retired capital owner withdraws a certain fraction of wealth annually. We study the long-term behavior of such processes. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_1905_04603 |
| institution | arXiv |
| publishDate | 2019 |
| record_format | arxiv |
| spellingShingle | A New Stock Market Valuation Measure with Applications to Retirement Planning Sarantsev, Andrey Statistical Finance 60F05, 60G10, 60J20, 62J05, 62M10, 62P05, 91B84 We generalize the classic Shiller cyclically adjusted price-earnings ratio (CAPE) used for prediction of future total returns of the stock market. We treat earnings growth as exogenous. The difference between log wealth and log earnings is modeled as an autoregression of order 1 with linear trend 4.6% and Gaussian innovations. Detrending gives us a new valuation measure. Our results disprove the Efficient Market Hypothesis. Therefore, long-run total returns equal long-run earnings growth plus 4.6%. We apply results to retirement planning. A withdrawal process governs how a retired capital owner withdraws a certain fraction of wealth annually. We study the long-term behavior of such processes. |
| title | A New Stock Market Valuation Measure with Applications to Retirement Planning |
| topic | Statistical Finance 60F05, 60G10, 60J20, 62J05, 62M10, 62P05, 91B84 |
| url | https://arxiv.org/abs/1905.04603 |