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Regular version of the site
Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Lev Gubarev
Is Gordon's Formula Dead? the Modern Cross-Country Study
Economics
(Bachelor’s programme)
9
2018
One can ask why it is so important to test the relevance of Gordon's Formula. The theory of Gordon’s formula is valid and works on specific premises. However, not many studies are devoted to the practical applicability of Gordon's formula, when the analysis is carried out for several markets simultaneously. The novelty of this study comprises ten developed markets with a big data series. Moreover, we expanded the testing methodology and conducted a regression analysis.

This research implies an exploration of the relevance of Gordon’s formula. In the concept of relevance, we include, firstly, an understanding of when it is possible to apply the Gordon’s formula, whether it is possible to expand the constraints associated with it, and secondly, testing this formula on real data and revealing the differences between the fundamental value and market prices. We are faced with the following question: whether Gordon's formula does not work or the market is overvalued / undervalued?

The purpose of this research is to identify the differences associated with the behavior of stock prices in the analyzed markets, using the method of testing the Gordon’s formula on the basis of comparing market prices of shares and theoretical prices.

The methodology of this study is based on the papers of foreign scientists in the field of economics and statistics. In this research, both special and general scientific methods were used.

We have shown that the market is overvalued now. For each of the following countries: Belgium, France, Sweden, the UK, Australia, Canada the market prices fell to the level of fundamental value or remained just above the fundamental value during the correction of the Dotcom bubble and the global financial crisis. For the rest countries: the US, Denmark, Italy, Switzerland the market prices fell significantly during these two shocks, but the market remained overpriced.

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