Stock Recommendations from Stochastic Discounted Cash Flows

Download or read book Stock Recommendations from Stochastic Discounted Cash Flows written by Giulio Bottazzi and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents two stocks recommendation systems based on a stochastic characterization of firm present value that extends the conventional discounted cash flow analysis. In the Single-Stock Quantile recommendation system, the market price of a company's stocks is compared with the estimated distribution of the company fair value to obtain an individual measure of mispricing, while in the Cross-Sectional Quantile system, a relative measure of mispricing is built using the fair value distribution of all firms at the same time. Both systems use mispricing information to build sell side and buy side portfolios. We provide a series of statistical exercises that show how these portfolios can consistently deliver significant excess returns, also when rebalancing costs are accounted for.