Long-Run Implied Market Fundamentals: An Exploration

Vol. 19, No. 3, 2021

Heinz Zimmermann

The paper studies the volatility and correlation pattern of the fundamental valuation parameters (growth rate and its determinants, discount rate) calculated from widely used valuation ratios using the Gordon formula, and compares the findings to well-known insights from the asset pricing literature. Our results reveal a substantially different picture of the volatility and cyclicality of the implied valuation parameters compared to estimates from econometric models using historical returns. We argue, in the spirit of Campbell (2008), that implied Gordon parameters can be interpreted as empirical proxies for conditional steady-state market fundamentals, which is supported by our findings. The insights of this paper are therefore particularly challenging for investors with a long-term investment horizon who base their decisions on fundamental valuation factors.