In this paper we apply a regression test of the volatility of asset prices to a cross-section data set of US stock prices each year between 1932-71. We show that the rejection of REEM in the time series domain carries over to a data set consisting of observations on a cross-section of individual share prices within a particular year, and we refer to this phenomena as excess dispersion of stock prices. In nearly all of the years over the period 1932-71 we find that stock prices are excessively dispersed. This finding is consistent with the existence of a firm specific bubble which drive a wedge between the values of pt*and pt. We go on to examine the relationship between the mis- pricing and market fundamentals which we take to be related to past dividends. Assuming that dividend yields proxy for growth expectations we find that investors are unduly optimistic about high growth stocks and too pessimistic about low expected growth stocks. Our results suggest that there must be a microeconomic source to this mis-pricing.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by Financial Markets Group in its series FMG Discussion Papers with number
dp246.
Did you know? All full texts are decentralized with the publishers, none reside on this server, thus making it possible to offer this service for free to all parties.