Please use this identifier to cite or link to this item:
Bottazzi, Giulio
Cordoni, Francesco
Livieri, Giulia
Marmi, Stefano
Year of Publication: 
Series/Report no.: 
LEM Working Paper Series No. 2020/15
In all investment decisions it is important to determine the degree of uncertainty associated with the valuation of a company. We propose an original and robust methodology to company valuation which replaces the traditional point estimate of the conventional Discounted Cash Flow (DCF) with a probability distribution of fair values. It hinges on two main ingredients: an econometric model for the company revenues and a set of firm-specific balance sheet relations that are estimated using historical data. The effectiveness and scope of our methodology are explored through a series of statistical exercises on publicly traded U.S. companies. We show that an uncertainty-adjusted indicator of mispricing, derived from the fair value distribution, is capable of predicting future abnormal returns. Then, we construct a new long-short valuation factor and we test that it is not redundant for describing average returns when used to augment traditional market factor models.
Stochastic Discounted Cash Flow
Valuation Uncertainty
Valuation Factor
Kalman Filter
Document Type: 
Working Paper

Files in This Item:

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.