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U.S. stock prices and macroeconomic fundamentals

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  • Black, Angela
  • Fraser, Patricia
  • Groenewold, Nicolaas

Abstract

Using 54 yeras of US quarterly data and a VAR model underpinned by a theory of the relationship between stock prices and output, this paper considers the deviations of US stock prices from their fundamental value. To do this we derive the fundamental price-output ratio and the fundamental stock price under different assumptions regarding the time-variability of returns, and proceed to compare these to actual data. Despite differences between model results, all imply cyclical deviations of actual values from values warranted by the expected growth in output - these deviations being relatively large since 1996.
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  • Black, Angela & Fraser, Patricia & Groenewold, Nicolaas, 2003. "U.S. stock prices and macroeconomic fundamentals," International Review of Economics & Finance, Elsevier, vol. 12(3), pages 345-367.
    • Handle: RePEc:eee:reveco:v:12:y:2003:i:3:p:345-367
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    3. Turuntseva, M. & Zyamalov, V., 2016. "Stock Markets under the Changing Terms of Trade," Journal of the New Economic Association, New Economic Association, vol. 31(3), pages 93-109.
    4. Junttila, Juha & Korhonen, Marko, 2011. "Utilizing financial market information in forecasting real growth, inflation and real exchange rate," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 281-301, April.
    5. Costello, Greg & Fraser, Patricia & Groenewold, Nicolaas, 2011. "House prices, non-fundamental components and interstate spillovers: The Australian experience," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 653-669, March.
    6. Patricia Fraser & Nicolaas Groenewold, 2004. "US share prices and real demand and supply shocks," Money Macro and Finance (MMF) Research Group Conference 2003 31, Money Macro and Finance Research Group.
    7. Benjamin Beckers, 2015. "The Real-Time Predictive Content of Asset Price Bubbles for Macro Forecasts," Discussion Papers of DIW Berlin 1496, DIW Berlin, German Institute for Economic Research.
    8. Parnes, Dror, 2020. "Exploring economic anomalies in the S&P500 index," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 292-309.
    9. K. Cuthbertson & D. Nitzsche & S. Hyde, 2007. "Monetary Policy And Behavioural Finance," Journal of Economic Surveys, Wiley Blackwell, vol. 21(5), pages 935-969, December.
    10. Branston, Christopher B. & Groenewold, Nicolaas, 2004. "Investment and share prices: fundamental versus speculative components," The North American Journal of Economics and Finance, Elsevier, vol. 15(2), pages 199-226, August.
    11. Nicolaas Groenewold, 2003. "Consumption and Stock Prices: Can We Distinguish Signalling from Wealth Effects?," Economics Discussion / Working Papers 03-22, The University of Western Australia, Department of Economics.
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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