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A Bayesian framework for combining valuation estimates

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  • Kenton Yee

Abstract

Obtaining more accurate equity value estimates is the starting point for stock selection, value-based indexing in a noisy market, and beating benchmark indices through tactical style rotation. Unfortunately, discounted cash flow, method of comparables, and fundamental analysis typically yield discrepant valuation estimates. Moreover, the valuation estimates typically disagree with market price. Can one form a superior valuation estimate by averaging over the individual estimates, including market price? This article suggests a Bayesian framework for combining two or more estimates into a superior valuation estimate. The framework justifies the common practice of averaging over several estimates to arrive at a final point estimate.
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Suggested Citation

  • Kenton Yee, 2008. "A Bayesian framework for combining valuation estimates," Review of Quantitative Finance and Accounting, Springer, vol. 30(3), pages 339-354, April.
    • Handle: RePEc:kap:rqfnac:v:30:y:2008:i:3:p:339-354
    DOI: 10.1007/s11156-007-0055-6
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    References listed on IDEAS

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    1. Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
    2. Gilson, Stuart C & Hotchkiss, Edith S & Ruback, Richard S, 2000. "Valuation of Bankrupt Firms," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 43-74.
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    Cited by:

    1. Yanfu Li, 2019. "Improving Analyst Target Price Performance Through Enhanced Valuation Techniques," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 13(2), pages 1-12.
    2. Salmanov, Oleg & Babina, Natalia & Bashirova, Svetlana & Samoshkina, Marina, 2015. "Multiples for Valuation Estimates of Companies in the Technology Sector of Emerging Markets," MPRA Paper 112271, University Library of Munich, Germany, revised 20 Mar 2015.
    3. Claude Bergeron & Tov Assogbavi & Jean-pierre Gueyie, 2020. "Conditional capital asset pricing model, long-run risk, and stock valuation," Economics Bulletin, AccessEcon, vol. 40(1), pages 77-86.
    4. Bergeron, Claude, 2013. "Dividend sensitivity to economic factors, stock valuation, and long-run risk," Finance Research Letters, Elsevier, vol. 10(4), pages 184-195.

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    More about this item

    Keywords

    Value investing; Financial statement analysis; Equity valuation; C11; C40; C53; E17; G11; G12; K22; M41;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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