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Stock prices and bond yields : Can their comovements be explained in terms of present value models?

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  • Shiller, Robert J.
  • Beltratti, Andrea E.

Abstract

Real stock prices seem to overreact to changes in long-term interest rates. That is, real stock prices drop when long-term interest rates rise (and rise when they fall) more than would be implied by a rational expectationspresent value model where expectations are based on a vector autoregression. This overreaction is not associated with any overreaction to changes in the short-run inflation rate. Over the last century real stock prices have shown little reaction to changes in inflation rates, and according to the model they should show little reaction. These conclusions were reached from an analysis of annual data in the United States 1871 to 1989 and the United Kingdom 1918 to 1989.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 30 (1992)
Issue (Month): 1 (October)
Pages: 25-46

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Handle: RePEc:eee:moneco:v:30:y:1992:i:1:p:25-46

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
  2. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  3. Shiller, Robert J, 1988. "The Probability of Gross Violations of a Present Value Variance Inequality," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1089-92, October.
  4. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," NBER Working Papers 2511, National Bureau of Economic Research, Inc.
  5. Campbell, John Y, 1990. "Measuring the Persistence of Expected Returns," American Economic Review, American Economic Association, vol. 80(2), pages 43-47, May.
  6. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  7. Robert B. Barsky, 1986. "Why Don't the Prices of Stocks and Bonds Move Together?," NBER Working Papers 2047, National Bureau of Economic Research, Inc.
  8. Kleidon, Allan W, 1988. "The Probability of Gross Violations of a Present Value Variance Inequality: Reply," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1093-96, October.
  9. Andrea E. Beltratti & Robert J. Shiller, 1991. "Actual and Warranted Relations Between Asset Prices," NBER Working Papers 3640, National Bureau of Economic Research, Inc.
  10. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  11. Bulkley, George & Tonks, Ian, 1989. "Are U.K. Stock Prices Excessively Volatile? Trading Rules and Variance Bounds Tests," Economic Journal, Royal Economic Society, vol. 99(398), pages 1083-98, December.
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