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A statistical investigation of a stock valuation model

Author

Listed:
  • Wilton Bernardino

    (Universidade Federal de Pernambuco, Cidade Universitária)

  • João B. Amaral

    (Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária)

  • Nelson L. Paes

    (Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária)

  • Raydonal Ospina

    (Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária
    CASTLab, Universidade Federal de Pernambuco, Cidade Universitária)

  • José L. Távora

    (Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária)

Abstract

The Federal Reserve (FED) model is an empirical approach commonly used for valuation of the stock market. The model compares the earnings yield of the stock market with the nominal yield of long-term government bonds. This work investigates the validity of the FED model using Brazilian financial data. To achieve our goal, we utilized an empirical model called Vector Error Correction model (VECM), that allows to investigate the hypothesis of cointegration and causality aspects between the variables. The main results indicate the existence of favorable evidence to the long run relationship between the yields in Brazil. Also, in Brazil, there is a clear causality effect from the fixed income yields to the stock market ones.

Suggested Citation

  • Wilton Bernardino & João B. Amaral & Nelson L. Paes & Raydonal Ospina & José L. Távora, 2022. "A statistical investigation of a stock valuation model," SN Business & Economics, Springer, vol. 2(8), pages 1-25, August.
    • Handle: RePEc:spr:snbeco:v:2:y:2022:i:8:d:10.1007_s43546-022-00270-x
    DOI: 10.1007/s43546-022-00270-x
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    More about this item

    Keywords

    Brazilian economy; Cointegration analysis; FED model; timing market model; Stock market; Fixed income; Vector error correction model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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