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An improved model for understanding equity prices

Author

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  • Dison, Will

    (Bank of England)

  • Rattan, Alex

    (Bank of England)

Abstract

Central bank policymakers monitor equity prices, alongside a range of other asset prices, to support both their monetary and financial stability objectives. A Dividend Discount Model (DDM) is a simple type of model that can be used to help understand past moves in equity prices. DDMs are based on the net present value relationship that relates equity prices to expected future shareholder payouts, risk-free interest rates and compensation for risk. The Bank has recently improved its DDM. The revised model accounts for share buybacks and variation over time in long-term growth expectations. It also better captures the variation in risk-free interest rates across maturities.

Suggested Citation

  • Dison, Will & Rattan, Alex, 2017. "An improved model for understanding equity prices," Bank of England Quarterly Bulletin, Bank of England, vol. 57(2), pages 86-97.
    • Handle: RePEc:boe:qbullt:0220
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2017/an-improved-model-for-understanding-equity-prices.pdf?la=en&hash=F0385353B45A130A1AA557165FBEC5E326FD57FB
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    Cited by:

    1. Altmeyer, Patrick & Boneva, Leva & Kinston, Rafael & Saha, Shreyosi & Stoja, Evarist, 2023. "Yield curve sensitivity to investor positioning around economic shocks," Bank of England working papers 1029, Bank of England.
    2. Douglas, Graeme & Roberts-Sklar, Matt, 2018. "What drives UK defined benefit pension funds' investment behaviour?," Bank of England working papers 757, Bank of England.

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