IDEAS home Printed from https://ideas.repec.org/p/ucb/calbwp/93-214.html
   My bibliography  Save this paper

Asset Prices and the Fundamentals: A Q Test

Author

Listed:
  • Roger Craine.

Abstract

This paper presents a test of the relationship between financial asset values and the fundamentals. The test is an indirect test based on Tobin's (1969) q model of investment. The advantage of this test is that it avoids conditioning on a specific model of equilibrium returns by substituting an observable proxy, capital, for the unobservable fundamental value of the firm. Section 1 of this paper shows that under mild restrictions the value of capital and the financial value of the firm should move together even if marginal or average q does not accurately describe the actual investment decision rule. Average q is a mean reverting process. Section 2 of the paper presents the results of tests for violations of the mean reversion restriction. The tests cannot reject the unit root null hypothesis for a long annual sample from 1926 through 1988 or a quarterly post WWII sample. Section 3 examines the power of the tests with Monte Carlo simulations. The simulations show that the tests have good power until the serial correlation in the series gets quite high. The tests cannot distinguish between no mean reversion and very slow mean reversion. The empirical evidence presented in this paper provides fairly strong evidence against the hypothesis that the financial and real values are closely linked in the short run or even in the medium run.

Suggested Citation

  • Roger Craine., 1993. "Asset Prices and the Fundamentals: A Q Test," Economics Working Papers 93-214, University of California at Berkeley.
  • Handle: RePEc:ucb:calbwp:93-214
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucb:calbwp:93-214. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/debrkus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.