Estimating the S&P Fundamental Value Using Star Models

This paper develops a new empirical measure of the S&P fundamental value under the rational expectation hypothesis. Thus, using the linearization of Campbell and Shiller (1988) and referring to the developments of Challe (2002), we extend the Dividend Discount Model (DDM) by introducing nonlinearity in estimating the expected future dividends and the discounted rate. Among many nonlinear models, we retained the STAR (Smooth Transition Autoregressive) models