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'Irrational exuberance' in the long-run UK stock market

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  • Soosung Hwang
  • Byung Khun Song

Abstract

Using the macroeconomic data for 1830-2004 in vector error correction models, we find that the UK stock price was largely in line with the equilibrium level. However, the UK stock price shows large and slow-moving positive or negative deviations from the equilibrium, forming cycles of at least a few decades in length. We also show that the equity premium is as low as 3.1% for the 175 years, which is far smaller than the 6 to 7% that has been suggested by many previous studies. Finally, contrary to general belief, the 1999 UK stock price did not appear to be overvalued in our study. We suggest that the 25 years of sharp increase in the UK stock price prior to 1999 can be understood as a mere mean-reversion towards the long-run equilibrium level.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 40 (2008)
Issue (Month): 24 ()
Pages: 3199-3211

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Handle: RePEc:taf:applec:v:40:y:2008:i:24:p:3199-3211

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Cited by:
  1. Andreas Humpe & Peter Macmillan, 2007. "Can macroeconomic variables explain long term stock market movements? A comparison of the US and Japan," CDMA Working Paper Series 200720, Centre for Dynamic Macroeconomic Analysis.
  2. Andreas Humpe & Peter D. Macmillan, 2005. "Can macroeconomic variables explain long term stock market movements? A comparison of the US and Japan," CRIEFF Discussion Papers 0511, Centre for Research into Industry, Enterprise, Finance and the Firm.

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