A growing body of literature in accounting and finance relies on implied cost of equity (COE) measures. Such measures are sensitive to assumptions about terminal earnings growth rates. In this paper we develop a new COE measure that is more accurate than existing measures because it incorporates...

This study predicts stock market volatility and applies them to the standard problem in finance, namely, asset allocation. Based on machine learning and model averaging approaches, we integrate the drivers’ predictive information to forecast market volatilities. Using various evaluation...

We show that the standard notion of residual income (RI) does not fulfill additive coherence. This gives rise to ambiguities and inconsistencies. The pitfall resides in the capital charge, which blends a non-market value with a market rate. We solve the problem by using a capital charge based on...

This paper highlights the use of a new strategic approach within a quantitative investment methodology in the context of making prudent asset allocation decisions. Three asset classes will frame the dynamic asset allocation discussion: Equities, Fixed Income, and Hedge Funds. The quantitative...

We study the use of residual income (RI) valuation methods by U.S. sell-side equity analysts, particularly as compared to DCF. We document that RI valuations are rare — just 1/16th as common as DCF — and that different RI and DCF valuations are not infrequently provided by the same analyst...

Since Liu, Nissim and Thomas (LNT, 2002), researchers have been perplexed by how simple earnings forecasts using multiples, apparently outperform the theory-based residual income model in terms of pricing error. This paper explains mathematically how LNT (2002) find this curious result and...

This paper investigates the behaviour of residual income scaled by beginning of period book value, i.e., residual return on equity (ROE), by performing panel unit root tests as well panel regression tests on Swedish data. Results show that residual return on equity does not follow a random walk,...

The development of the residual income model (RIM) has potential implications for the empirical researchers as the model specifies relationship between earnings and book values as proxies for equity values and accounting variables. Although researchers have supported RIM as an alternative to the...

In this paper, we develop a framework for evaluating the impact of conservative accounting on the structure of residual income models of equity valuation. We explore specific examples of both unconditional and conditional conservatism and observe a common mathematical structure. We proceed to...

We compare the valuation accuracy of the equity value estimates inferred from empirical implementations of the abnormal earnings growth model (Ohlson and Juettner-Nauroth 2005; the OJ estimates) with the residual income model (Ohlson 1995; the RIV estimates). We find that the OJ estimates generally...