The accuracy of equity valuation methods

Value Investing via Bayesian Inference

“…As a starting point for the model development, we use pricing error research. Pricing error terms in the existing literature are commonly expressed as signed pricing errors (PE)reflecting valuation bias-or absolute pricing errors (APE)-reflecting valuation accuracy; see Henschke (2009) and Anesten et al (2019) and references therein for more details: where V 0 is the investor's current estimate of intrinsic value and P 0 is the current observable market price. These error measures can also be transformed to assign different weights to outliers, e.g.…”

Value investing via Bayesian inference

“…As a starting point for the model development, we use pricing error research. Pricing error terms in the existing literature are commonly expressed as signed pricing errors (PE)—reflecting valuation bias—or absolute pricing errors (APE)—reflecting valuation accuracy; see Henschke (2009) and Anesten et al (2019) and references therein for more details:where V 0 is the investor's current estimate of intrinsic value and is the current observable market price. These error measures can also be transformed to assign different weights to outliers, e.g.…”

“…Assessing the valuation accuracy and valuation bias of different equity valuation models in research is (almost) as old as the models themselves. Examples of contributions assessing the accuracy and bias of several discounted payoff valuation models are Penman and Sougiannis (1998), Ahmed et al (2000), Francis et al (2000), Frankel and Lee (1998), Courteau et al (2001), Barth et al (2005), Choi et al (2006), Dittmann and Maug (2008), Henschke (2009), Jorgensen et al (2011), Chang et al (2012), Ho et al (2017), Anesten et al (2019) and Gao et al (2019). Despite the large amount of research, the field has been dealing with several pervasive problems.…”