Allin Cottrell: Thanks for the empirical information. peace, patrick At 11:29 PM 4/22/01 -0400, you wrote: >On Tue, 17 Apr 2001, Gerald_A_Levy wrote: > > > * What, if anything, is different about the current > > bubble in the U.S. stock market? > >What bubble? I'm teaching econometrics this semester, and to >illustrate the "error correction" model specification I ran an error >correction model of the Dow-Jones average, using quarterly data, >1959-2000. I hypothesized that in equilibrium the Dow ought to be >proportional to the value of an annuity defined as the value of >after-tax corporate profits divided by a suitable long-term interest >rate (i.e. the present value of the hypothetical stream of current >profits, maintained indefinitely). The model gave an equilibrium >proportionality factor of about 0.90 -- i.e. the "right" value for the >Dow index is about 90% of the present value of the corporate profit >stream, in billions of dollars. We're currently just about at that. >For most of the 1990s the Dow was below equilibrium, and busy catching >up. > >Allin Cottrell.
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