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Calculating First Moments and Confidence Intervals for Generalized Stochastic Dividend Discount Models

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DOI: 10.4236/jmf.2013.32027    4,548 Downloads   7,003 Views   Citations

ABSTRACT

This paper presents models of equity valuation where future dividends are assumed to follow a generalized Bernoulli process consistent with the actual dividend payout behavior of many firms. This uncertain dividend stream induces a probability distribution of present value. We show how to calculate the first moment of this distribution using functional equations. As well, we demonstrate how to calculate a confidence interval using Monte Carlosimulation. This first moment and interval allows an analyst to determine whether a stock is overor under-valued.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

W. Hurley, "Calculating First Moments and Confidence Intervals for Generalized Stochastic Dividend Discount Models," Journal of Mathematical Finance, Vol. 3 No. 2, 2013, pp. 275-279. doi: 10.4236/jmf.2013.32027.

References

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[3] W. J. Hurley and L. D. Johnson, “Stochastic Two-Phase Dividend Discount Models,” Journal of Portfolio Management, Vol. 23, No. 4, 1997, pp. 91-98. doi:10.3905/jpm.1997.409614
[4] W. J. Hurley and L. D. Johnson, “Generalized Markov Dividend Discount Models,” The Journal of Portfolio Management, Vol. 25, No. 1, 1998, pp. 27-31. doi:10.3905/jpm.1998.409658
[5] W. J. Hurley and Frank Fabozzi, “Dividend Discount Models,” In: F. J. Fabozzi, Ed., Selected Topics in Equity Portfolio Management, New Hope, Pennsylvania, 1998.
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[7] Y. L. Yao, “A Trinomial Dividend Valuation Model,” Journal of Portfolio Management, Vol. 23, No. 4, 1997, pp. 99-103. doi:10.3905/jpm.1997.409618

  
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