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Emerald Article: Individual stock market risk and price valuation: the case of Titan S.A. Paraschos Maniatis

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To cite this document: Paraschos Maniatis, (2011),"Individual stock market risk and price valuation: the case of Titan S.A.", Managerial Finance, Vol. 37 Iss: 4 pp. 347 - 361 Permanent link to this document: http://dx.doi.org/10.1108/03074351111115304 Downloaded on: 31-05-2012 References: This document contains references to 43 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 1155 times since 2011. *

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Individual stock market risk and price valuation: the case of Titan S.A.
Paraschos Maniatis
Department of Business Administration, Athens University of Economics and Business, Athens, Greece and Kuwait-Maastricht Business School, Salmiya, Kuwait
Abstract
Purpose The purpose of this study is twofold: to test the hypothesis that the closing prices of Titan S.A. stock can be approximated by a random walk; and to valuate the risk associated to this stock. The rst question is equivalent to the efcient market hypothesis (EMH) and, therefore, to the predictability of stocks closing price. The second question follows the rst in a natural way, since stocks predictability and risk are in an inverse relationship. Design/methodology/approach The paper investigates the existence of unit roots in the stock and in all stock index, in the lines of Dicky-Fuller modeling. It then investigates the stocks risk focusing the interest in the behavior of the time series volatility under the hypothesis that they can be described by an autoregressive scheme. Finally, it looks at the relationship between stock returns and market returns in the lines of the market model. Findings The study concludes that although the predictability of the stock returns is impossible, the risk associated with the stock can to some extent be statistically rationalised. Originality/value The papers value lies in looking into the probability that if the EMH is even approximately true, accepting above-average risks is the only way to obtain better-than-average returns. Keywords Stock markets, Financial risk, Stock returns, Greece Paper type Case study

Stock market risk and price valuation 347

1. Literature review The efcient market hypothesis, risk and risk measures The efcient market hypothesis. What the efcient market hypothesis (EMH) is concerned with is under what conditions an investor can earn excess returns in a stock. In every day terms, the EMH is the claim that all information available is already reected in the price of the stock. This statement in the EMH context is equivalent to the statement that the stocks closing price Pt is a random walk. And since the best forecast for the tomorrows price in a random walk is todays price forecast Pt1 EPt1 =Pt ; Pt21 ; . . .P1 all known Pt , it results that all past information is useless. The origin of the modern nance stochastic is orie de la Speculation, that the Bacheliers (1990) work who claimed in his thesis The logged closing prices lnPt of a stock constitute a time series in which lnPt-lnPt2 1 (which Bachelier denes as the shares returns) are stationary independent increments, normally distributed with zero mean and nite variance. In the nance literature, the EMH and the Bacheliers claims are lumped together and collectively labeled random walk theories (RWT), which come in three different versions:

Managerial Finance Vol. 37 No. 4, 2011 pp. 347-361 q Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074351111115304

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(1) The weak RWT. No technical analysis trading system based on price data alone can ever outperform the market. The weak version of RWT is just Bacheliers claim that one cannot create information about tomorrows prices from looking at what happened in the past. (2) The semi-strong RWT. No trading scheme based on any publicly available information will be able to outperform the market. According to semi-strong RWT, not only is technical analysis useless, fundamentals are too. However, the semi-strong version applies only to publicly available information of the sort one can see in the nancial releases of the companies or listening to governmental pronouncements. All such publicly available information has already been taken into account in setting the current price of the stock. But perhaps there is still hope for a winning portfolio-selection strategy by employing insider sources of information. For this case one has. (3) The strong RWT. No trading scheme based upon any information sources whatsoever can outperform the market. Thus, the strong version claims that no matter where one gets information, it will prove useless in the long-term in obtaining better than market average increment results. These ideas come with assumptions, either explicit, like Bacheliers statistical properties, or implicit, like the EMHs inherent assumptions about the pricing mechanisms and rationality on the part of investors. There is, however, something inherently paradoxical about the EMH. On the one hand, the EMH claims that is useless to gather information; it will do no better at all in the development of a trading strategy that will outperform the market. On the other hand, the EMH claims that all available information has already been incorporated into the price of the stock. But how can this happen if no one gathers information? In order for the EMH to be valid, there must be a sufciently large number of traders who do not believe it. So it can be true if the traders do not think it is true [. . .]. Further, if the EMH is even approximately true, then it should be impossible to make consistently better-than-average returns. Yet, the empirical evidence clearly indicates otherwise; stock exchange markets in all over the world exhibit such better results. How can this fact be reconciled with consistently better results? The answer is probably that better results can only be obtained by accepting above-average risks. Risk measured by volatility. If the random walk hypothesis is true, it would appear that one cannot really study stock prices in any empirical sense. After all, the aim of most empirical research is to use explanatory variables to explain the variation in a dependent variable. In the present case, the behavior of stock prices cannot be explained empirically other than to say that their changes are inherently unpredictable. What is then the interest in the investigation of stock price behavior? One answer is that one can try to explain the volatility of stock prices. In particular, to investigate whether volatility changes over time in any particular way. In stock markets, volatility is related to risk. That is, if a stock is highly volatile then its price can increase quite substantially, but it can also decrease substantially. An investor interesting in purchasing such a volatile stock might make large gains if the price rises substantially, but could also make losses if it drops. This argument suggests that volatility is a measure of the riskiness of a stock. However, one has to be careful in equating volatility with risk.

Financial models (e.g. the capital asset, capital pricing model, CAPM or the market model) emphasize that the riskiness of a portfolio of stocks depends not only on the volatility of the individual stocks, but also on the correlation between the stocks in the portfolio: consider a portfolio of two stocks that are both very volatile but are also perfectly negatively correlated with one another. The negative correlation suggests that whenever one stock drops in value, the other one rises. So even though each stock is individually risky (due to the high volatility), the risks cancel each other out, and overall the portfolio is quite safe. While the volatility of stocks is an important aspect in an investment decision, there is another aspect that is also important, namely, how the market risk affects the stocks risk. This question is approached by the market model. Risk measured by the market model. The rationale behind the market model is to relate the returns of an individual stock to the market risk. The tool for this purpose is to regress the stocks returns to the market returns as measured by the all stocks index and to analyze the stock variation to a part explained by the regression and to a residual not explained part. Strictly speaking the market model investigates the stocks returns as a function of the market returns. But in nance, the returns are inherently connected with risk. Interrogation on returns means interrogation on risk. 2. Data, symbols and computation details In our investigation, we have considered the daily closing prices of the rms common stock for the year 2003. Although, there exists much more recent data, we have for obvious reasons chosen as investigation year the year 2003, which is remote from the present situation of the stock. The stocks closing prices are paired to the closing prices of all stocks general index for the same dates. The data covers the period 2 January 2003 through 31 December 2003, which denes a time series with 247 daily observations. We have used the following symbols for all performed analyses: Pt closing price of Titan stock in day t: DPt Pt 2 Pt21 VPt stocks volatility in day t dened as the squared deviation of lnPt =Pt21 from the mean of the terms lnPt =Pt21 , t 2; 3; . . . ; 247:   Pt 2 Pt21 the stock returns in day t RPt Pt21 Mt closing price of all stock index (market index) stock in day t: DMt Mt 2 Mt21 VMt markets volatility in day t dened as the squared deviation of lnMt =Mt21 from the mean of the terms lnMt =Mt21 , t 2; 3; . . . ; 247:   Mt 2 Mt21 the stock returns in day t: RMt Mt21

Stock market risk and price valuation 349

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For all gures and calculations, we have used the STATISTICA program. The original data and the calculation details are shown in the appropriate STATISTICA les, appended to this text. However, for convenience reasons, we have embedded the main results in the text. 3. Statistical analysis The statistical analysis includes investigation of unit roots existence in the time series, risk valuation applying volatility analysis of the time series and risk valuation on the base of the market model. 3.1 Testing for unit roots in the stock and the market Figure A1 shows in adjusted scaling the closing prices of the stock and market index. The two-time series exhibit a remote but clear similarity in cycles and a rather opposite trend. The similarity in the cyclical movements implies that both time series follow more or less the same market behavior. This conclusion is supported by the spectral analysis of the time series. Figures A2 and A3 show the results of spectral analysis of the time series, after trend elimination and mean extraction. The periodograms of the stock and market exhibit common cycles of duration approximately 60, 120 and 240 days. Therefore, regardless of the opposite trends the series seem to move in the same variation pattern. However, each series considered individually does not exhibit the form of a stationary time series, since the time mean of the series changes with the time. The most of the econometric studies of the stock (and nancial in general) time series contain a unit root i.e. they exhibit behavior of a random walk. The consequences of the existence of unit root are fatal in relation to the possibility of forecast the future values of the stock. In order to give evidence to this anticipation, we check the hypothesis of existence of unit roots in the series considering them as a random walk. The analysis relates to the effective markets hypothesis, since under this hypothesis the closing prices is a random walk and the best prediction for the stock is its last realized value. Therefore, the testing of the hypothesis is reduced to testing whether the time series is a random walk or not. In the following, we test the hypothesis that the time series of the stock and all stock indexes are random walks (with or without drift). For this purpose, we apply the Dickey-Fuller unit root test. According to the formulation of the unit root tests, the models to be tested are: DPt d bPt21 1t and: DMt d bMt21 1t 2 1

350

The term 1t in the models is a random variable (residuals) with zero mean and constant variance. The regressions results are shown in Tables I and II. Testing the values of the b estimates in the above regressions according to the testing scheme H0: b 0 against the alternative H1: b , 0 at level of signicance 5 percent, the unit root hypothesis cannot be discarded t 2 2.84690 . 2 3.14 in model (1) and in model (2) t 2 0.135337 . 2 3.14. Hence, the time series P and M can be regarded as random walks and there is no better forecast for their closing values than their last realized values. Nevertheless, one can still have some information on the risk exposure

of the stock, investigating the stocks volatility, in particular investigating the possibility that the volatility can be described by an autoregressive scheme. 3.2 Volatility of stock and market Figure A4 shows the volatilities of the closing values of the stock and market. The shape of the schedules gives some evidence that the courses of these two variables are related. Indeed, this anticipation is enforced by the regression of the stocks volatility VP to markets volatility VM, as obtained by the model: VPt a bVMt 1t 3

Stock market risk and price valuation 351

Table III shows the regression results. As shown in Table III, the relationship of the two variables is poor (adjusted R 2 10 percent) but the regressions parameters are signicantly different to zero ( p-level 0 for intercept and slope). Hence, the stocks volatility follows in a remote way the behavior of the markets volatility. However, since the scope of the study is the investigation is the stocks predictability, it is necessary to check the stocks (and the markets) predictability by investigating the behavior of each variable considered as a univariate variable. For this purpose, we consider each variable as an autoregressive scheme. Figures A5-A7 show the autocorrelation and the partial autocorrelation functions for the stocks volatility. The shape of the autocorrelation function advocates for the anticipation that the stocks volatility is a white noise. However, estimating the autoregressive scheme: VPt a bVPt21
Standard error of parameter 0.311221 0.018725

Parameter d b

Parameter estimate 0.876131 2 0.0533309

t (244)

p-level

Adj. R 2

Dickey-Fuller critical value for left-hand t-test at 5 percent 2 3.14 (for 246 observ.)

2.81514 0.005274 0.02818 2 2.84690 0.004791

Table I. Regression results for unit root test in the model DPt d bPt21 1t

Standard Parameter error of Parameter estimate parameter d b 3.537515 2 0.000815 11.61601 0.00602

t (244)

p-level

Adj. R 2

Dickey-Fuller critical value for left-hand t-test at 5 percent 2 3.14 (for 246 observ.)

0.304538 0.760978 0.00000 2 0.135337 0.892457

Table II. Regression results for unit root test in the model DMt d bMt21 1t

Parameter a b

Parameter estimate 0.000153 0.497922

Standard error of parameter 0.000026 0.094008

t (244) 5.851587 5.296565

p-level 0.000000 0.000000

Adj. R 2 0.09944216

Table III. Regression results in the model VPt a bVMt 1t

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Positive and signicant values for the model parameters are obtained. The parameters estimation is shown in Table IV. Based on the p-level values for the model parameters, we cannot reject the hypothesis that the stocks volatility is an AR(1) scheme. Therefore, the stocks volatility is in some degree, within a condence interval, predictable. For comparison reasons, we give in Table V the estimation results for the autoregressive scheme: VMt a bVMt21 1t : 5

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In this model, the behavior of the markets volatility as a white noise cannot be rejected, since the betas estimate is not signicant at a 5 percent signicance level (the estimation results are shown in Table V). It is likely that the specic cyclical character of the companys activity renders offers to the stocks volatility a degree of predictability, which is not enjoyed by the markets volatility. 3.3 The market model In this paragraph, we investigate the risk valuation based on the market model. The market model is dened as: RPt a bRMt 1t a b RPt Pt 2 Pt21 =Pt21 RMt Mt 2 Mt21 =Mt21 intercept. slope (the beta coefcient in nancial vocabulary). the returns of the individual stock in time t. the returns of the market (all stocks index) in time t. regressions residual error in time t.

1t

In most of times b, the estimate of b, is interpreted as the measure of risk associated to the stock in the sense that if b , 1 the stock is less responding to the market variations and more responding if b . 1. However, a better risk measure is the variance explained by the regression: if (SRP)2 is the total variance of the depended variable RS can be analyzed as: SRP 2 b2 SRM 2 Se2
Parameter estimate 0.000225 0.134196 Asympt. standard error 0.000027 0.063570 Asympt. t (244) 8.333619 2.110991 Lower Upper 95 percent conf. 95 percent conf. 0.000171 0.008980 0.000278 0.259412

Table IV. Parameters estimates in the autoregressive model VPt a bVPt21 1t

Parameter a b

p-level 0.000000 0.035791

Table V. Parameters estimates in the autoregressive model VMt a bVMt21 1t

Parameter a b

Parameter estimate 0.000145 2 0.029237

Asympt. standard error 0.000015 0.064161

Asympt. t (244)

p-level

Lower Upper 95 percent conf. 95 percent conf. 0.000116 2 0.155618 0.000174 0.097144

9.805888 0.000000 2 0.455674 0.649030

In this context, the variance b2(SRM)2, explained by the regression, is considered to be the systematic risk of the stock, associated to the market variations, while the term (Se)2, the not explained part of variance by the regression, is considered as the specic risk of the stock due to its individual character. We see that b is involved again in the stock risk but it plays a different role as parameter in the risk measurement. The ratio b2 SRM 2 =SRP 2 , which is the squared regressions coefcient of determination, measures the portion of the stocks systematic risk in the total stocks risk. In Table VI, we read a p-level value . 0.05 for the regressions intercept and a zero p-level value for the beta coefcient. From these values, we conclude that the intercept is not statistically signicant, while the statistical signicance of the beta coefcient cannot be rejected at signicance level 5 percent. Further, the value of betas estimate (0.676685), although less than one, indicates sufcient response of the stocks returns to the market ones. In this aspect, the risk associated to the stock, according to the nancial interpretation of beta, is less than the market risk. However, much better interpretable is the systematic stocks risk as measured by R 2, which counts for 29.4 percent of the total stocks risk, and the specic risk 100 2 29.4 70.6 percent. The two measures are not contradictory, they do not measure exactly the same thing: beta measures the response of the returns to the market returns; R 2 measures the risk which can be attributed to the market risk, while 1 2 R 2 measures the risk the connected to the specic character of the stock. From this point of view, both beta coefcient and R 2 measure risk, but different kinds of risk. 4. Conclusions Summarizing the ndings of the analysis, we can proceed to the following conclusions: . The time series of the Titan stock is exposing the characteristics of a random walk, which discards any hope of forecasting its future closing prices, even in a condence interval. Differing the time series one will obtain a white noise, which is cannot offer any further information. The same conclusion is valid for the all stocks time series. The above results do conrm the long experience from the stock exchange market: the market is unpredictable. If this was not the case, the speculators could systematically obtain (a few) positive prots. But this outcome has never been conrmed by the stock exchange practice and experience. . The positive value of the beta coefcient in the market model regression shows that the movements of the Titan stock follow the movements of the all stocks index. The practical meaning of this result is that the investor has to anticipate the all stocks index in order to estimate the evolution of his own stocks. . As indicated by the value of beta coefcient the cyclical character of Titans activities does not substantially differentiate its returns from the market returns. . The Titans stock is exposed to a specic risk about 70 percent of the global stocks risk.

Stock market risk and price valuation 353

Parameter a b

Parameter estimate 2 0.001110 0.676685

Standard error of parameter 0.000807 0.066651

t (244) 2 1.37584 10.15259

p-level 0.170134 0.000000

R2 0.29410088

Table VI. Regression results in the model RPt a bVMt 1t

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Although, the closing prices of the stock do not offer any prediction help, the stocks volatility can to an extent be foreseen, since its volatility can plausibly be described by an autoregressive scheme AR(1). Besides, regressing the stocks volatility to markets volatility, one obtains statistically signicant estimates of intercept and slope, which can offer additional information for the stocks volatility. Given the high degree of risk in the stock, one has to reckon with increased speculation prots in order to restore the balance higher risk/higher prots.

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Draper, P. and Paudyal, K. (1995), Empirical irregularities in the estimation of beta: the impact of alternative estimation assumptions and procedures, Journal of Business Finance and Accounting, Vol. 22, pp. 157-77. Emov, A.V. (Ed.) (1988), Random Functions in Higher Mathematics Part 3, Mir, Moscow. Fabozzi, F. and Francis, J. (1977), Stability tests for alphas and betas over bull and bear market conditions, Journal of Finance, Vol. 32, pp. 1093-9. Fabozzi, F. and Francis, J. (1979), Mutual fund systematic risk for bull and bear markets, Journal of Finance, Vol. 34, pp. 1243-50. Faff, R. (1992), Capital market anomalies: a survey on the evidence, Accounting Research Journal, Vol. 5, pp. 3-22. Faff, R., Lee, J. and Fry, T. (1992), Time stationarity of systematic risk: some Australian evidence, Journal of Business Finance and Accounting, Vol. 19, pp. 253-70. Fama, E. (1976), Foundations of Finance, Basic Books, New York, NY. Fama, E. and French, K. (1992), The cross-section of expected returns, Journal of Finance, Vol. 47, pp. 427-65. Fama, E. and French, K. (1993), Common risk factors in the returns on stocks and bonds, Journal of Financial Economics, Vol. 33, pp. 3-56. Fama, E. and French, K. (1996), Multifactor explanations of asset pricing anomalies, Journal of Finance, Vol. 51, pp. 55-84. Handa, P., Kothari, S. and Wasley, C. (1989), The relation between the return interval and betas: implications for the size effect, Journal of Financial Economics, Vol. 23, pp. 79-100. Hawawini, G. (1983), Why beta shifts as the return interval changes, Financial Analysis Journal, Vol. 39, pp. 73-7. Huang, D.S. (1969), Regression and Econometric Methods, Wiley, New York, NY. Lehn, J. and Wegmann, H. (1992), Einfuerung in die Statistik, Teubner, Stuttgart. Lintner, J. (1986), The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, Vol. 47 No. 1, pp. 13-37. McInish, T. and Wood, R. (1986), Adjusting for beta bias: an assessment of alternative techniques: a note, Journal of Finance, Vol. 41, February, pp. 277-86. Murray, L. (1995), An examination of beta estimation using daily Irish data, Journal of Business Finance and Accounting, Vol. 22, pp. 893-906. Ross, S.A. (1976), The arbitrage theory of capital asset pricing, Journal of Economic Theory, Vol. 13 No. 3, pp. 341-60. Scholes, M. and Williams, J. (1977), Estimating betas from non-synchronous data, Journal of Financial Economics, Vol. 5, pp. 309-27. Sharpe, W.F. (1963), A simplied model for portfolio analysis, Management Science, Vol. 9 No. 2, pp. 277-93. Theil, H. (1970), Principles of Econometrics, Wiley, New York, NY. orie des Probabilite s, Mir, Moscow. Ventsel, H. (1973), The (The Appendix follows overleaf.)

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Appendix. STATISTICA les

19 P (Left) M (Right)

2,400

356

18

2,200

17

2,000

16

1,800

15

1,600

Figure A1. Closing prices of stock and market index

14 0 16 32 48 64 80 96 112 128 144 160 176 192 208 224 240

1,400

50

50

40 Periodogram values

40

30

30

20

20

10

10

0 0 20 40 60 80 100 120 140 160 180 200 220 240

0 260

Figure A2. Spectral analysis of stock

Period Note: No. of cases: 246

1,6e6 1,4e6 1,2e6 Periodogram values 1e6 8e5 6e5 4e5 2e5 0 0 20 40 60 80 100 120 140 Period 160 180 200 220 240

1,6e6 1,4e6 1,2e6 1e6 8e5 6e5 4e5 2e5 0 260

Stock market risk and price valuation 357

Note: No. of cases: 246

Figure A3. Spectral analysis of market

0.0030 VP 0.0026 VM

0.0022

0.0018 0.0014

0.0010

0.0006

0.0002 0.0002 0 16 32 48 64 80 96 112 128 144 160 176 192 208 224 240

Figure A4. Stock and market volatilities

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Figure A5. Autocorrelation function VP

Lag 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Corr. +0.134 +0.077 +0.004 +0.088 +0.058 +0.027 +0.061 +0.205 +0.088 +0.031 +0.045 +0.161 +0.074 +0.086 +0.013

S.E. 0.0634 0.0632 0.0631 0.0630 0.0629 0.0627 0.0626 0.0625 0.0623 0.0622 0.0621 0.0619 0.0618 0.0617 0.0615 0.0 0.5

Q 4.48 5.98 5.98 7.95 8.79 8.97 9.93 20.72 22.73 22.97 23.50 30.26 31.71 33.67 33.71 1.0

p 0.0342 0.0503 0.1124 0.0933 0.1177 0.1752 0.1928 0.0080 0.0068 0.0109 0.0150 0.0026 0.0027 0.0023 0.0037

1.0 0.5 Note: Standard errors are white-noise estimates

Figure A6. Partial autocorrelation function VP

Lag 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Corr. +0.134 +0.060 0.015 +0.087 +0.037 +0.003 +0.055 +0.190 +0.029 0.010 +0.039 +0.130 +0.014 +0.057 -0.020

S.E. 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 1.0 0.5 0.0 0.5 1.0

Note: Standard errors assume AR order of k1

0.004 Observed 0.003 Forecast 90.0000%

0.004

0.003

Stock market risk and price valuation 359

0.002

0.002

0.001

0.001

0.000

0.000

0.001 0.001 20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 Notes: Start of origin: 1; end of origin: 246

Figure A7. Forecasts; model: (1,0,0) seasonal lag: 12 input VP

Lag 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Corr. 0.029 +0.030 +0.101 +0.046 +0.176 0.010 0.083 +0.176 +0.069 +0.008 +0.007 +0.069 +0.052 +0.043 0.086

S.E. 0.0634 0.0632 0.0631 0.0630 0.0629 0.0627 0.0626 0.0625 0.0623 0.0622 0.0621 0.0619 0.0618 0.0617 0.0615 0.0 0.5

Q 0.21 0.44 3.00 3.54 11.40 11.43 13.20 21.17 22.41 22.43 22.44 23.70 24.42 24.90 26.84 1.0

p 0.6450 0.8029 0.3917 0.4712 0.0440 0.0760 0.0675 0.0067 0.0077 0.0131 0.0212 0.0224 0.0275 0.0356 0.0301

1.0 0.5 Note: Standard errors are white-noise estimates

Figure A8. Autocorrelation function VM

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Figure A9. Partial autocorrelation function VM

Lag 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Corr. 0.029 +0.029 +0.103 +0.052 +0.176 0.010 0.107 +0.138 +0.075 0.008 0.013 +0.078 0.005 +0.013 0.070

S.E. 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0638 0.0 0.5 1.0

1.0 0.5 Note: Standard errors assume AR order of k1

0.002 Observed 0.002 Forecast 90.0000%

0.002

0.002

0.001

0.001

5e4

5e4

Figure A10. Forecasts; Model: (1,0,0) seasonal lag: 12 input: VM

5e4 5e4 20 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 Notes: Start of origin: 1; end of origin: 246

0.06 RP RM 0.04

Stock market risk and price valuation 361

0.02

0.00

0.02

0.04

0.06 0 16 32 48 64 80 96 112 128 144 160 176 192 208 224 240

Figure A11. Stock and market returns

0.06

0.04

0.02 RP

0.00

0.02

0.04

0.06 0.04

0.03

0.02

0.01

0.00 RM

0.01

0.02

0.03

0.04

0.05

Note: y = 0.001+ 0.677 * x + eps

Figure A12. Regression of RP to RM

Corresponding author Paraschos Maniatis can be contacted at: pman@sch.gr

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