Equity Market Valuation: Assessing the Adequacy of Value Measures to Predict Index Returns

Following the work of Lee, Myers and Swaminathan (1999), we develop robust tests of their intrinsic value measure, along with other traditional measures of value, for the Australian Stock Market. Specifically, we apply the tests to a broadly matched version of the Australian Asia Pacific Extra Liquid Series (APELS), which was recently introduced to Australia. A primary motivation for the paper was to assess the suggestion implied in the US study of a violation of capital market efficiency, where the use of publicly available information, namely a fundamental valuation measure using consensus analysts forecasts, could be used to predict returns. Our results do not support the conclusions reached by Lee, Myers and Swaminathan (1999). Possible reasons for this are the differing Market structures, the use of a different Index or the use of alternative statistical tests.