IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v30y2008i3p339-354.html
   My bibliography  Save this article

A Bayesian framework for combining valuation estimates

Author

Listed:
  • 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.
(This abstract was borrowed from another version of this item.)

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
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11156-007-0055-6
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-007-0055-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    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.
    3. Coulson, N.E. & Robins, R.P., 1989. "Forecast Combination In A Dynamic Setting," Papers 8-88-4, Pennsylvania State - Department of Economics.
    4. Kaplan, Steven N & Ruback, Richard S, 1995. "The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 50(4), pages 1059-1093, September.
    5. Yong Keun Yoo, 2006. "The valuation accuracy of equity valuation using a combination of multiples," Review of Accounting and Finance, Emerald Group Publishing, vol. 5(2), pages 108-123, May.
    6. Treynor, Jack L & Black, Fischer, 1973. "How to Use Security Analysis to Improve Portfolio Selection," The Journal of Business, University of Chicago Press, vol. 46(1), pages 66-86, January.
    7. Diebold, Francis X, 1988. "Serial Correlation and the Combination of Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(1), pages 105-111, January.
    8. Jing Liu & Doron Nissim & Jacob Thomas, 2002. "Equity Valuation Using Multiples," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 135-172, March.
    9. Clemon, Robert T & Winkler, Robert L, 1986. "Combining Economic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 39-46, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    3. Bergeron, Claude, 2013. "Dividend sensitivity to economic factors, stock valuation, and long-run risk," Finance Research Letters, Elsevier, vol. 10(4), pages 184-195.
    4. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Husák, 2022. "Do Damodaran's Multiples Value a Company Accurately? Evidence from Germany," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2022(3), pages 5-21.
    2. Roosenboom, Peter, 2012. "Valuing and pricing IPOs," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1653-1664.
    3. Elkin Castaño & Luis Fernando Melo, 1998. "Métodos de Combinación de Pronósticos: Una Aplicación a la Inflación Colombiana," Borradores de Economia 109, Banco de la Republica de Colombia.
    4. Frank Asche & Bård Misund, 2016. "Who’s a major? A novel approach to peer group selection: Empirical evidence from oil and gas companies," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1264538-126, December.
    5. Dittmann, Ingolf & Weiner, Christian, 2005. "Selecting comparables for the valuation of European firms," SFB 649 Discussion Papers 2005-002, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. Timmermann, Allan, 2006. "Forecast Combinations," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 4, pages 135-196, Elsevier.
    7. Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
    8. Dittmann, I. & Maug, E.G., 2006. "Valuation Biases, Error Measures, and the Conglomerate Discount," ERIM Report Series Research in Management ERS-2006-011-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    9. David F. Hendry & Michael P. Clements, 2004. "Pooling of forecasts," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 1-31, June.
    10. Jens M�ller, 2014. "The Challenge of Assessing the Market Value of Private Companies Using a Standardised Combination Method for Tax Purposes - Lessons to be Learnt from Past Experience," European Accounting Review, Taylor & Francis Journals, vol. 23(1), pages 117-141, May.
    11. Hong-Yi Chen & Cheng Few Lee & Wei-Kang Shih, 2020. "Technical, Fundamental, and Combined Information for Separating Winners from Losers," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 95, pages 3319-3365, World Scientific Publishing Co. Pte. Ltd..
    12. 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.
    13. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    14. repec:hum:wpaper:sfb649dp2005-002 is not listed on IDEAS
    15. Barbara Fidanza, 2008. "The Valuation by Multiples of Italian Firms," Working Papers 14-2008, Macerata University, Department of Studies on Economic Development (DiSSE), revised Nov 2008.
    16. Feng Chen & Kenton K. Yee & Yong Keun Yoo, 2010. "Robustness of Judicial Decisions to Valuation‐Method Innovation: An Exploratory Empirical Study," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1094-1114, November.
    17. Peter Roosenboom, 2007. "How Do Underwriters Value Initial Public Offerings? An Empirical Analysis of the French IPO Market," Contemporary Accounting Research, John Wiley & Sons, vol. 24(4), pages 1217-1243, December.
    18. Andreea Vasiliu & Neculai Tabara, 2013. "Methods for Determining the Degree of Underestimation or Overrating of Shares Using PER Analysis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 9(3), pages 84-99, June.
    19. Georgia Pazarzi, 2014. "Comparison of the Residual Income and the Pricing - Multiples Equity Valuation Models," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 88-114.
    20. Wen-Shiung Lee, 2013. "Merger and acquisition evaluation and decision making model," The Service Industries Journal, Taylor & Francis Journals, vol. 33(15-16), pages 1473-1494, December.
    21. Eberhart, Allan C., 2005. "A comparison of Merton's option pricing model of corporate debt valuation to the use of book values," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 401-426, March.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:30:y:2008:i:3:p:339-354. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.