Are Israeli Stock Prices Too High?
The paper, prepared in January 1994 before the 1994 fall in stock prices, assembles an unprecedented and comprehensive collection of historic and current stock market data including the size of the Exchange, initial public offerings, returns and other indicators to address the question of whether stock prices at the end of 1993 are too high. Similar to French and Poterba's 1991 study on Japan, I calibrate the changes in discount factors and growth expectations required to explain the rise of Israeli share values in 1992 and 1993 in a simplified Modigliani Miller type framework. Various proxies for actual changes in required returns and growth expectations are considered. The analysis indicates that the market run-up can be explained within the framework of a Miller-Modigliani growth model primarily by assuming that growth expectations have increased substantially. It is difficult, however, to find evidence to support that proposition.