> : How fast will stock price converge to its “intrinsic value”? I’ve often wondered this, myself. In order to get an expected return, we need not just a target price, but an estimate of how fast it will get there. If we think the intrinsic value is $110 per share, but today’s market price is $100 per share, it makes a difference whether a convergence is expected to happen in 6 months or 12 months. And without some kind of expected return, then it’s very hard to figure out how much of your portfolio to allocate to a position. Maybe it’s made up by just comparing with the potential mispricings of other opportunities that you have. Of course, risk is important to consider too. And then, if it takes more than a little while to converge, then it’s highly likely that market conditions will change, making one’s estimate of intrinsic value change. Convergence might actually be the intrinsic value dropping to the market value, rather than vice versa.
cfafrank Wrote: ------------------------------------------------------- > You will be the king of Wall Street if you know > the answer. Kind of funny… Kinda like the old “free beer tomorrow”… If it takes a year, doe it mean that tomorrow it will only take 364 days?
that would be a fun model… Intrinsic Value = f(a,b,c,d,e,f,g,h,i…ac) where a,b,c…ac each follow independent brownian motions. Estimate t where Intrinsic Value = Market Price. maybe that should be on CFA level 4, can you do that in excel? maybe VBA?
ahahah Wrote: ------------------------------------------------------- > cfafrank Wrote: > -------------------------------------------------- > ----- > > You will be the king of Wall Street if you know > > the answer. > > > Kind of funny… Kinda like the old “free beer > tomorrow”… If it takes a year, doe it mean that > tomorrow it will only take 364 days? ahahahaha…
I think the various option pricing models are trying to find the expected value of an asset price given a fixed time. Are there some models that do the reverse, ie given a fixed price and what is the expected time to reach that price? Another interesting problem is if it is possible to combine fundamental analysis with such a expected time model? bchadwick Wrote: ------------------------------------------------------- > > : How fast will stock price converge to its > “intrinsic value”? > > I’ve often wondered this, myself. In order to get > an expected return, we need not just a target > price, but an estimate of how fast it will get > there. If we think the intrinsic value is $110 > per share, but today’s market price is $100 per > share, it makes a difference whether a convergence > is expected to happen in 6 months or 12 months. > > And without some kind of expected return, then > it’s very hard to figure out how much of your > portfolio to allocate to a position. Maybe it’s > made up by just comparing with the potential > mispricings of other opportunities that you have. > Of course, risk is important to consider too. > > And then, if it takes more than a little while to > converge, then it’s highly likely that market > conditions will change, making one’s estimate of > intrinsic value change. Convergence might > actually be the intrinsic value dropping to the > market value, rather than vice versa.
ymc Wrote: ------------------------------------------------------- > I think the various option pricing models are > trying to find the expected value of an asset > price given a fixed time. Are there some models > that do the reverse, ie given a fixed price and > what is the expected time to reach that price? > Yup… it’s called a Forward Contract. > Another interesting problem is if it is possible > to combine fundamental analysis with such a > expected time model? But what would you gain from this?
darkhelmet Wrote: ------------------------------------------------------- > ymc Wrote: > -------------------------------------------------- > ----- > > I think the various option pricing models are > > trying to find the expected value of an asset > > price given a fixed time. Nope. Remember that option prices depend on vol not expectation. > Are there some models > > that do the reverse, ie given a fixed price and > > what is the expected time to reach that price? > > > Yup… it’s called a Forward Contract. It’s not a forward price. If what you mean is something like say the stock follows geometric Brownian motion, what is the distribution of time until it reaches some level [blah] given a drift and vol, it’s a fundamental stochastic processes problem that is like the first problem you do when you see something called “the reflection principle”. Can’t remember the asnwer and I’m too lazy to look it up. I guess that for Brownian motion the expectation to any level is infinite so it is for geometric Brownian motion too. That’s the problem that says you start having kids and decide to stop when you have an even number of boys and girls, how many kids do you expect to have? (ans: infinite). > > > Another interesting problem is if it is > possible > > to combine fundamental analysis with such a > > expected time model? > But what would you gain from this?
JoeyDVivre Wrote: ------------------------------------------------------- > darkhelmet Wrote: > -------------------------------------------------- > ----- > > ymc Wrote: > > > -------------------------------------------------- > > > ----- > > > I think the various option pricing models are > > > trying to find the expected value of an asset > > > price given a fixed time. > > Nope. Remember that option prices depend on vol > not expectation. > > > Are there some models > > > that do the reverse, ie given a fixed price > and > > > what is the expected time to reach that > price? > > > > > Yup… it’s called a Forward Contract. > It’s not a forward price. > > If what you mean is something like say the stock > follows geometric Brownian motion, what is the > distribution of time until it reaches some level > given a drift and vol, it’s a fundamental > stochastic processes problem that is like the > first problem you do when you see something called > “the reflection principle”. Can’t remember the > asnwer and I’m too lazy to look it up. I guess > that for Brownian motion the expectation to any > level is infinite so it is for geometric Brownian > motion too. > Hum, for a process with a drift I don’t see how the expectation could be infinite. Dont tell me because there’s a non-zero probability of the price-barrier spread to reach infinity! Obviously, I don’t think that’s what he meant, he just confused expectated price with forward price…
With drift I guess it’s not infinite. The book are about 8 ft from me but I’m too lazy.