Chapter V
CONCLUSION
The relevance of these valuation models depends, therefore, on the assertion that the business landscape has fundamentally changed: that traditional rules of business success have been modified by technological developments in two key ways. First, barriers to entry are much more substantial than in old-economy businesses. Second, the beneficiaries of these barriers to entry will be existing but recently-established firms, even though their scale of operations is very small relative to the potential size of the market. First-mover advantages are far more significant than in old-economy businesses. These are different but related claims and both propositions are considered in the following section on business strategy. For the moment, however, I note that doubts had set in by 2001, and Amazon’s market value had fallen to .7 billion at 31 March, 2001.
The valuation of stock markets as a whole is discussed in an earlier review article (Wadhwani, 1999).[1] In 1996, when Mr Greenspan famously talked of “irrational exuberance”, the US stock market was priced, relative to corporate earnings, at levels on a par with 1929 and ahead of the two other peaks of valuation in the twentieth century, 1901 and 1966 (Shiller, 2000).[2] Thereafter, the headline Dow-Jones index rose from 6437.1 (5 December, 1996) to an all-time high of 11722.98 (14 January, 2000).
The argument here also is that traditional valuation criteria, such as price-earnings ratios, have been made obsolete by the new economy. Alternative views of appropriate market levels centre round applications of the dividend growth model.
It begins from the risk-free bond rate, adding a premium for the additional risk associated with investment in equities Glassman and Hassett (1999).[3] The anticipated growth of dividends has three components. In the long run, we might expect the growth of corporate earnings and the dividend stream from them to follow study examined the intraday and interday dynamics of both the level of and the rate of growth of national income.
This changes in the FTSE (Financial Times-Stock Exchange) 100 index. Like numerous previous studies, there was a find significant evidence of mean reversion and hence predictability in pricing changes measured over high (minute-by-minute) and low (daily) frequencies. For low-frequency data, predictability is driven neither by arbitrage activity nor by microstructure effects. Rather, it is a statistical illusion that is the result of overdifferencing a trend-stationary series.
[1] Wadhwani, S. (1999), ‘The US stock market and the global economic crisis’, National Institute Economic Review, 67, January, pp. 86-105.
[2] Shiller, R.J. (2000), Irrational Exuberance, Princeton N.J., University Press.
[3] Supra Glassman and Hassett
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