A White Paper on Equity Market Valuation Index

Abstract

This paper presents a new approach to look at equity market valuations. The paper formulates a derivative of three valuation based ratios widely used by investors and fund managers. The derivative “Equity Market Valuation Index” converts valuation ratios in to an index that rages between 0-100. It uses the principal of mean reversion to identify extreme valuation points of equity markets. The derivative makes valuations easy to understand even for investors with no background knowledge of finance and investments. The construct is to help investors identify high risk “Bubbles” and attractive “Burst” phases in equity markets.