QUANTITATIVE MODELS FOR EQUITY VALUATION

Abstract

Equity valuation is a cornerstone of investment decision-making, relying increasingly on quantitative models to estimate the intrinsic value of stocks. This paper reviews and compares the application of popular quantitative equity valuation models—including the Discounted Cash Flow (DCF), Dividend Discount Model (DDM), Residual Income Model (RIM), and multiples-based approaches—in the context of Pakistan’s equity market. Utilizing firm-level data from the Pakistan Stock Exchange (PSX) for 2010–2024, the study evaluates the models’ predictive accuracy, applicability, and limitations given the market’s unique financial and economic environment. The results highlight the strengths of discounted cash flow-based models for mature firms, while multiples-based valuation shows advantages in liquidity and ease of use. The paper also discusses challenges such as data quality, market inefficiencies, and model assumptions, providing insights for investors and analysts in emerging markets.