On Tue, 17 Apr 2001, Gerald_A_Levy wrote: > * What, if anything, is different about the current > bubble in the U.S. stock market? What bubble? I'm teaching econometrics this semester, and to illustrate the "error correction" model specification I ran an error correction model of the Dow-Jones average, using quarterly data, 1959-2000. I hypothesized that in equilibrium the Dow ought to be proportional to the value of an annuity defined as the value of after-tax corporate profits divided by a suitable long-term interest rate (i.e. the present value of the hypothetical stream of current profits, maintained indefinitely). The model gave an equilibrium proportionality factor of about 0.90 -- i.e. the "right" value for the Dow index is about 90% of the present value of the corporate profit stream, in billions of dollars. We're currently just about at that. For most of the 1990s the Dow was below equilibrium, and busy catching up. Allin Cottrell.
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