Quest for the Holy Grail: The Fair Value of the Equity Market

Published: 25 March 2017

Key Points

  • Macroeconomic volatility is a useful tool in investors’ quest for the fair value of the stock market.
  • This volatility is associated with the equity risk premium: investors are willing to pay a higher price for stocks when there is lower aggregate uncertainty.
  • Macroeconomic volatility has been at historically low levels in recent years, driven largely by technological innovation, greater market integration, and improvements in monetary policy implementation.
  • Whereas lower volatility justifies a higher fair value than the historical average, the current price of the stock market still appears expensive.