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Assessing the risks of asset overvaluation: models and challenges

Author

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  • Sara Cecchetti

    (Bank of Italy)

  • Marco Taboga

    (Bank of Italy)

Abstract

We propose methods to compute confidence bands for the fundamental values of stocks and corporate bonds. These methods take into account uncertainty about future cash flows and about the discount factors used to discount the cash flows. We use them to assess the current degree of under-/over-valuation of asset prices. We find no evidence of over-valuation of the stocks and corporate bonds of the major economies.

Suggested Citation

  • Sara Cecchetti & Marco Taboga, 2017. "Assessing the risks of asset overvaluation: models and challenges," Temi di discussione (Economic working papers) 1114, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1114_17
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2017/2017-1114/en_tema_1114.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Sara Cecchetti, 2019. "A Quantitative Analysis of Risk Premia in the Corporate Bond Market," JRFM, MDPI, vol. 13(1), pages 1-33, December.
    2. Stefano Neri & Stefano Siviero, 2019. "The non-standard monetary policy measures of the ECB: motivations, effectiveness and risks," Questioni di Economia e Finanza (Occasional Papers) 486, Bank of Italy, Economic Research and International Relations Area.
    3. Benigno Pierpaolo & Canofari Paolo & Di Bartolomeo Giovanni & Messori Marcello, 2020. "The ECB’s Asset Purchase Programme: Theory, effects, and risks," wp.comunite 00147, Department of Communication, University of Teramo.
    4. Sara Cecchetti, 2017. "A quantitative analysis of risk premia in the corporate bond market," Temi di discussione (Economic working papers) 1141, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    stock risk premium; bond risk premium; fundamental value; under-/over-valuation;
    All these keywords.

    JEL classification:

    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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