Abstract:
This paper seeks to model the intrinsic value of the S&P 500 by a continuous time state spate
model of the adjustment process in the stock market. The model focuses on input-output relations,
and the value is generated as the output of the model with earnings and the interest rate as the inputs.
The model is found to fit the data well, and the 1987 stock price bubble shows up clearly as a gap
between price and value.
