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Greespan often refers to an interest rate appraoch the fed uses when valuing the stock market.

Could some one tell me the name of this approach (i.e. interest rate approach) and/or the theory behind this valuation approach.
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No. of Recommendations: 0
Greespan often refers to an interest rate appraoch the fed uses when valuing the stock market.

Could some one tell me the name of this approach (i.e. interest rate approach) and/or the theory behind this valuation approach.



Hi,

I think you are referring to the Federal Reserve Board Valuation Model. The idea is the market is fairly valued when the earnings yield equals the interest rate on a 10 year Treasury. Here are links to two articles:

"The broken model"
http://money.cnn.com/2003/02/13/markets/fedmodel/

"Federal Reserve Board Valuation Model"
http://www.brown.edu/Students/Brown_Economic_Review/archive/1999/bose.pdf

Keith O'Malley
TMF KGOMalley

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