JMF  Vol.3 No.2 , May 2013
Calculating First Moments and Confidence Intervals for Generalized Stochastic Dividend Discount Models
Author(s) William J. Hurley*
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.


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
[1]   M. J. Gordon, “The Investment, Financing and Valuation of the Corporation,” Irwin, Homewood, Illinois, 1952.

[2]   W. J. Hurley and L. D. Johnson, “A Realistic Dividend Valuation Model,” Financial Analysts Journal, Vol. 50, No. 4, 1994, pp. 50-54. doi:10.2469/faj.v50.n4.50

[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.

[6]   J. B. Williams, “The Theory of Investment Value,” Harvard University Press, Cambridge, 1938.

[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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