Mean reversion in a price-earnings ratio and under / overvaluation in the Brazilian stock market

ABSTRACT The market price-earnings ratios differ from those of each share. Despite allowing for several pertinent analyses, authors have rarely addressed these valuation in the Brazilian context. We can use it to evaluate whether stock is overvalued (undervalued). In this article, we analyze mean reversion a ratio based on Ibovespa and identify periods overvaluation (undervaluation) market. considered period December 2004 June 2018. Until then, there are no studies that sought used non-linear econometric methods. analyzed using unit root test incorporates Fourier function deterministic term. identified through regime probabilities obtained Markov Switching model, estimated with ratio. results evidenced has trend exhibits reversion. Thus, should provide information future returns, mostly when very dispersed relation historical standards. four interposed five undervaluation. Mean contraposes Efficient Markets Hypothesis. There other applications tests Furthermore, adopting model consists methodological contribution. Investors take advantage identification establish investment strategies.