This study tests the validity of the Residual Income Model (RIM) by employing VAR-based cross equation restrictions test proposed by Campbell and Shiller (1987). We estimate a bivariate stationary VAR using data of Taiwan's stock market index of the past ten years. The test results indicate that RIM is consistent with the data and is hence valid for Taiwan's stock valuation. The results also imply the main variables of RIM, residual income and book value, are intrinsic-value relevant indicators capable of explaining Taiwan's stock price movements. Therefore, investors can take advantage of the residual income valuation technique to predict future stock prices and assess investment risks in the markets.
關聯:
The Empirical Economics Letters vol. 8, no. 10 pp.1011-1020
