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The U.S. Stock Market and Fundamentals: A Historical Decomposition

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  • David Dupuis
  • David Tessier
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    Abstract

    The authors identify the fundamentals behind the dynamics of the U.S. stock market over the past 30 years. They specify a structural vector-error-correction model following the methodology of King, Plosser, Stock, and Watson (1991). This methodology identifies structural shocks with the imposition of long-run restrictions. It allows the authors to calculate an equilibrium measure of stock market value based on the permanent components of the time series. A better understanding of the components that drive stock market movements could provide insight into the potential effects of the recent technological revolution on the dynamics of the stock market's equilibrium value, as suggested by Hobijn and Jovanovic (2001).

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp03-20.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 03-20.

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    Length: 32 pages
    Date of creation: 2003
    Date of revision:
    Handle: RePEc:bca:bocawp:03-20

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    Related research

    Keywords: Transmission of monetary policy;

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    1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
    2. Christopher J. Neely, 2002. "How expensive are stocks?," Monetary Trends, Federal Reserve Bank of St. Louis, issue Jun.
    3. Peter C.B. Phillips, 1995. "Impulse Response and Forecast Error Variance Asymptotics in Nonstationary VAR's," Cowles Foundation Discussion Papers 1102, Cowles Foundation for Research in Economics, Yale University.
    4. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    5. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    6. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February.
    7. Robert B. Barsky & J. Bradford De Long, 1992. "Why Does the Stock Market Fluctuate?," NBER Working Papers 3995, National Bureau of Economic Research, Inc.
    8. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
    9. 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.
    10. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
    11. Steven A. Sharpe, 1999. "Stock prices, expected returns, and inflation," Finance and Economics Discussion Series 1999-02, Board of Governors of the Federal Reserve System (U.S.).
    12. Wickens, Michael R., 1996. "Interpreting cointegrating vectors and common stochastic trends," Journal of Econometrics, Elsevier, vol. 74(2), pages 255-271, October.
    13. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79.
    14. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
    15. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
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