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How big is the speculative component in Australian share prices?

  • Black, Angela
  • Fraser, Patricia
  • Groenewold, Nicolaas

Using 20 years of Australian quarterly data, this paper decomposes Australian share prices into their fundamental and speculative components. To do this we derive the fundamental share-price-output ratio and, hence, the fundamental share price from a resticted vector-autoregressive model relating the aggregate real share-price index to real output. Our estimates use different assumptions regarding shareholders required real rate of return. Our results imply that a significant speculative component exists in share prices (around 10% in mid-2000) and that share-price over/underevaluation has a life-span of around 4 years.

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Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 55 (2003)
Issue (Month): 2 ()
Pages: 177-195

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Handle: RePEc:eee:jebusi:v:55:y:2003:i:2:p:177-195
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