We adopt a standard equity valuation relation,the constant-growth dividend discount
model (DDM),as the base for our P–E modelling.The advantage of the DDM is that it
allows identification of the fundamental determinants of P–E and provides their expected
signs in the empirical model.The DDM,when transformed into a P–E determination
model,takes the form:这里是个公式
where P,E,D,g and k represent the stock price,periodic earnings per share,declared
dividend,discount rate,and growth rate of earnings per share respectively,and the
subscripting reflects the time period.
However,casting the earnings-scaled DDM as a behavioural model suitable for
statistical estimation raises some problems.In particular,reinterpretation of the growth
rate in terms of some form of expected value is required.Additionally,the relevant market
risk-related premium needs to be measured and incorporated into the discount rate or
otherwise represented in the model.The problems of adequately measuring expected growth and of properly reflecting the risk premium in the model lead us to extend its form
beyond that immediately derived from the DDM.