Quest for the Holy Grail: The Fair Value of the Equity Market
Published: 25 March 2017
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.