Uncertainty in Valuation Models: A Simulation-Based Evaluation of the Technology Bubble

Abstract

Stock markets have seen severe price drops over the last 20 years such as the burst of the technology bubble. The mainstream view is that exuberance inflated prices before the burst. This study applies the Schwartz-Moon fundamental valuation model to find no conclusive evidence for overvaluation for tech firms at the price peak. The model is simulation-based and incorporates real-option theory that practitioners commonly not prefer. Such models, however, can complement other valuation models, which is especially relevant in times of market distortions when any additional information can help to make more reasonable investment decisions.