Investment and Share Prices: Fundamental versus Speculative Components
AbstractThis paper uses quarterly US data from 1953(6) to 2000(6) to investigate the effects of share-price changes on investment. We focus on the distinction between speculative and fundamental components of share-price movements and we contribute to the literature by evaluating four alternative methods of decomposing share-price movements into these two components. The four methods are: (1)a decomposition based on regressing share-returns on a set of variables designed to capture fundamentals; (2)the use of the price-earnings ratio; (3)the use of the dividend yield and (4)a structural VAR model based on the dividend-discount equation. We find that, no matter what the method of decomposition is, shocks to both fundamental and speculative components have positive effects on investment and that, in contrast to the earlier literature, the effect of the speculative shock is at least as large as that of a shock to fundamentals.
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Bibliographic InfoPaper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 03-18.
Length: 39 pages
Date of creation: 2003
Date of revision:
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More information through EDIRC
investment; stock prices; fundamentals;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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