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Do Japanese Stock Prices Reflect Macro Fundamentals?

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  • Wenjuan Chen
  • Anton Velinov
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    Abstract

    This paper investigates to what extent the fundamentals of the real economy are re ected in the stock prices of Japan. A Markov switching VAR model with switching variances is used to test the structural identi cation scheme. Identification of fundamental and nonfundamental shocks is shown to be supported by the data. Based on the appropriate structural restriction, the historical stock prices are decomposed into fundamental components and nonfundamental components. The decomposition shows that the linkage between Japanese stock prices and real activity shocks became strengthened since the bubble collapsed in the beginning of 1990s.

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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2012-037.pdf
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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2012-037.

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    Length: 25 pages
    Date of creation: May 2012
    Date of revision:
    Handle: RePEc:hum:wpaper:sfb649dp2012-037

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    Keywords: Stock price; real activity; financial crisis; structural restrictions;

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    1. Goyal, Vidhan K. & Yamada, Takeshi, 2002. "Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan," CEI Working Paper Series 2002-11, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    2. Markku Lanne & Helmut Luetkepohl & Katarzyna Maciejowska, 2009. "Structural Vector Autoregressions with Markov Switching," Economics Working Papers ECO2009/06, European University Institute.
    3. Shiller, Robert J & Kon-Ya, Fumiko & Tsutsui, Yoshiro, 1996. "Why Did the Nikkei Crash? Expanding the Scope of Expectations Data Collection," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 156-64, February.
    4. Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, vol. 53(1), pages 5-26.
    5. Burbidge, John & Harrison, Alan, 1985. "An historical decomposition of the great depression to determine the role of money," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 45-54, July.
    6. Nicolaas Groenewold, 2004. "Fundamental share prices and aggregate real output," Applied Financial Economics, Taylor & Francis Journals, vol. 14(9), pages 651-661.
    7. Binswanger, Mathias, 2004. "How important are fundamentals?--Evidence from a structural VAR model for the stock markets in the US, Japan and Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(2), pages 185-201, April.
    8. Ying Huang & Feng Guo, 2008. "Macro shocks and the Japanese stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 18(17), pages 1391-1400.
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