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Are fundamentals still relevant for European economies in the post-Euro period?

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  • Laopodis, Nikiforos T.

Abstract

A structural VAR model, with stock prices, real economic activity, a short-term interest rate and inflation, was applied to four European countries to investigate whether economic fundamentals play an important role in their national stock markets. The analysis considers the pre- and post-Euro introduction periods. In general, the results suggest a breakdown in the relationship between real economic activity and real stock returns during the post-Euro period. Second, impulse response analyses reveal that (shocks by) fundamental variables still influence somewhat real stock returns for some countries but the extent and nature of their impact differ among countries in the post-Euro period. Finally, an examination of equity risk premiums corroborates the above findings and, overall, they may be interpreted as the equity markets having a mind of their own, disconnected from the fundamentals and that they are significantly affected by foreign rather than country-specific forces.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 5 (September)
Pages: 835-850

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:5:p:835-850

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Structural VAR Stock prices Economic activity Pre- and post-Euro Fundamentals;

References

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  1. Morana, Claudio & Beltratti, Andrea, 2002. "The effects of the introduction of the euro on the volatility of European stock markets," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 2047-2064, October.
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  11. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
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Citations

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Cited by:
  1. Anton Velinov, 2013. "Can Stock Price Fundamentals Properly be Captured?: Using Markov Switching in Heteroskedasticity Models to Test Identification Schemes," Discussion Papers of DIW Berlin 1350, DIW Berlin, German Institute for Economic Research.
  2. Mina Dragouni & George Filis & Nikolaos Antonakakis, 2013. "Time-Varying Interdependencies of Tourism and Economic Growth: Evidence from European Countries," FIW Working Paper series 128, FIW.

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