By Anne Vila Wetherilt and Olaf Weeken of the Bank's Monetary Instruments and Markets Division.
This article examines the usefulness of summary statistics, such as the price-earnings ratio and the dividend yield, that are commonly used in valuing equity markets. But these measures are very sensitive to assumptions made about the (unobservable) equity risk premium, as well as to the precise definitions of earnings or dividends used in the calculations. This limits their usefulness as summary statistics of equity valuations.
Equity valuation measures: what can they tell us?