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Stock prices and bond yields : Can their comovements be explained in terms of present value models?

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  • Shiller, Robert J.
  • Beltratti, Andrea E.

Abstract

Real stock prices seem to overreact to changes in long-term interest rates. That is, real stock prices drop when long-term interest rates rise (and rise when they fall) more than would be implied by a rational expectations present value model where expectations are based on a vector autoregression. This overreaction is not associated with any overreaction to changes in the short-run inflation rate. Over the last century real stock prices have shown little reaction to changes in inflation rates, and according to the model they should show little reaction. These conclusions were reached from an analysis of annual data in the united states 1871 to 1989 and the united Kingdom 1918 to 1989.
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  • Shiller, Robert J. & Beltratti, Andrea E., 1992. "Stock prices and bond yields : Can their comovements be explained in terms of present value models?," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 25-46, October.
  • Handle: RePEc:eee:moneco:v:30:y:1992:i:1:p:25-46
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    References listed on IDEAS

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    1. Campbell, John Y, 1990. "Measuring the Persistence of Expected Returns," American Economic Review, American Economic Association, vol. 80(2), pages 43-47, May.
    2. Bulkley, George & Tonks, Ian, 1989. "Are U.K. Stock Prices Excessively Volatile? Trading Rules and Variance Bounds Tests," Economic Journal, Royal Economic Society, vol. 99(398), pages 1083-1098, December.
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    6. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    7. Beltratti, Andrea E & Shiller, Robert J, 1993. "Actual and Warranted Relations between Asset Prices," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 387-402, July.
    8. Shiller, Robert J, 1988. "The Probability of Gross Violations of a Present Value Variance Inequality," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1089-1092, October.
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