The Comovement of Stock Prices
The authors test whether comovements of individual stock prices can be justified by economic fundamentals. This is a test of the present value model of security valuation with the constraint that changes in discount rates depend only on changes in macroeconomic variables. Then, stock prices of companies in unrelated lines of business should move together only in response to changes in current or expected future macroeconomic conditions. Using a latent variable model to capture unobserved expectations, the authors find excess comovement of returns. They show that this excess comovement can be explained in part by company size and degree of institutional ownership, suggesting market segmentation. Copyright 1993, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Volume (Year): 108 (1993)
Issue (Month): 4 (November)
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