9. Real-Life Case Study: Identifying Overvalued and Undervalued Airlines

A preceding chapter offered a real-life example which illustrated a construction and application of a time-series econometric model. In contrast, in this chapter, we present an example of the cross-sectional model, based on the observed stock prices and financial results of selected airline companies, listed on global stock exchanges. The purpose of the model discussed in this chapter is to capture the statistical relationships between relative market values of selected airlines (as measured by their price-to-sales ratios) on one side and their selected accounting ratios, computed on the basis of their reported financial statements. Finally, the obtained model will be used in identifying potentially undervalued and overvalued stocks.