Estimating Economic Index Trends Using Statistical and Computational Simulations

In order to speculate about the future of an economy, it is crucial to understand economic trends. The fundamental relationship between the share price of a company’s stock and its per-share earnings, also known as the P/E ratio, is a good indicator of the trend of the economy. While investors have used the P/E ratio to determine whether to buy or sell a certain stock, relatively less attention has been paid to the significance of the P/E ratio in terms of its ability to reflect the status of the economy. This paper collected about a century’s worth of P/E ratio data and used the Gumbel distribution to analyze the data. Then, the processed data were plotted in a frequency graph in order to visualize the general trend of the data. In addition, the data were plugged into MATLAB, a programming software, and were experimented with multiple fitting models that could offer further insight to the data trend. Using these methods revealed that lower P/E values are more likely to repeatedly occur, while higher P/E values are much less likely to repeatedly occur.