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A Cointegrated VAR Analysis of Stock Price Models: Fundamentals, Psychology and Structural Change

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  • Nicholas Mangee
  • Michael D. Goldberg

Abstract

This paper provides an empirical investigation of leading models of stock price fluctuations, including those based on canonical present value and behavioral considerations. It uses the cointegrated VAR framework to test the models’ competing predictions concerning the roles of fundamentals, psychology, and structural change in driving fluctuations. We rely on a novel dataset from Bloomberg News to capture the influence of psychological factors and the broader information that market participants use contemplating stocks’ fundamental values. We find that stock prices, earnings, and interest rates are cointegrated, but only when measures of psychological factors, a broader information set, and mean shifts are included in the cointegration relation. The results provide support for the scapegoat and imperfect knowledge models of stock prices, with weak evidence in favor of bubble models.

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  • Nicholas Mangee & Michael D. Goldberg, 2020. "A Cointegrated VAR Analysis of Stock Price Models: Fundamentals, Psychology and Structural Change," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(4), pages 352-368, October.
    • Handle: RePEc:taf:hbhfxx:v:21:y:2020:i:4:p:352-368
    DOI: 10.1080/15427560.2019.1692844
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    Cited by:

    1. Roman Frydman & Nicholas Mangee, 2021. "Expectations Concordance and Stock Market Volatility: Knightian Uncertainty in the Year of the Pandemic," JRFM, MDPI, vol. 14(11), pages 1-13, November.

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