Discussion Paper

No. 2016-42 | October 24, 2016
Market Dynamics When Participants Rely on Relative Valuation

Abstract

Relative-valuation is a technique whereby financial analysts estimate the value of an asset by comparing it to its peers. The author formalizes the decision-making structure of a relative-valuation strategy and simulate a market defined by its use.  He finds that when the distribution of peer valuation-multiples is skewed high or low, the market will tend to equilibrate over or undervalued, respectively. He furthers this analysis by looking at the effect that subjective analyst adjustments of market multiples might have and concludes that they have the potential to be highly destabilizing.

Data Set

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The data set for this article can be found at: http://dx.doi.org/10.7910/DVN/QPOWWV

JEL Classification

G02 D53

Cite As

Sean Lavelle (2016). Market Dynamics When Participants Rely on Relative Valuation. Economics Discussion Papers, No 2016-42, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-42

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