Equity market valuation (bottom-up vs top-down)

CFA Level III Economics
#1

Example 5 mentions - top-down models can be slow in detecting cyclical turns.

Example 7 mentions - bottom-up may be more optimistic than top-down heading into recession and more pessimistic than top down coming out.

Aren’t thouse statements contradictory? Shouldn’t bottom-up be more pessimistic heading into the recession and vice versa?

Thanks!

#2

I agree this seem contradictory but what i concluded from these sections is:

-Bottom-up is based on management forecasts which tend to me more optimistic (hence even heading into recession, management are likely to be optimistic).

  • Top-down is based on econometrics which work well as long as the estabilished relationships are stable- y= mx +c. When there is a sudden change in trends/relationships, econometrics wont pick that. Hence slow to such changes
#3

for a top down model - you are using historical data - and that does not have enough time to change and reflect the current trends. so your econometric model is based on dated data - so it would be slow to detect changes that are ongoing.