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US Stock Prices and Macroeconomic Fundamentals

Author

Listed:
  • Angela Black
  • Patricia Fraser

    (Aberdeen Asset Management Professor of Finance and Investment Management)

  • Nicolaas Groenewold

    (Department of Economics, The University of Western Australia)

Abstract

Using 54 yeras of US quarterly data and a VAR model underpinned by a theory of the relationship between stock prices and output, this paper considers the deviations of US stock prices from their fundamental value. To do this we derive the fundamental price-output ratio and the fundamental stock price under different assumptions regarding the time-variability of returns, and proceed to compare these to actual data. Despite differences between model results, all imply cyclical deviations of actual values from values warranted by the expected growth in output - these deviations being relatively large since 1996.

Suggested Citation

  • Angela Black & Patricia Fraser & Nicolaas Groenewold, 2001. "US Stock Prices and Macroeconomic Fundamentals," Economics Discussion / Working Papers 01-08, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:01-08
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    Citations

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    Cited by:

    1. Patricia Fraser & Nicolaas Groenewold, 2004. "US share prices and real demand and supply shocks," Money Macro and Finance (MMF) Research Group Conference 2003 31, Money Macro and Finance Research Group.
    2. Benjamin Beckers, 2015. "The Real-Time Predictive Content of Asset Price Bubbles for Macro Forecasts," Discussion Papers of DIW Berlin 1496, DIW Berlin, German Institute for Economic Research.
    3. Parnes, Dror, 2020. "Exploring economic anomalies in the S&P500 index," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 292-309.
    4. Nicolaas Groenewold, 2003. "Consumption and Stock Prices: Can We Distinguish Signalling from Wealth Effects?," Economics Discussion / Working Papers 03-22, The University of Western Australia, Department of Economics.
    5. Miyakoshi, Tatsuyoshi & Tsukuda, Yoshihiko & Shimada, Junji, 2016. "Magnitudes of Market Inefficiency: Theory and Application," Japan and the World Economy, Elsevier, vol. 39(C), pages 23-36.
    6. Fredj Jawadi, 2008. "Estimating The S&P Fundamental Value Using Star Models," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 2(1), pages 137-146.
    7. Fredj Jawadi & Georges Prat, 2012. "Arbitrage costs and nonlinear adjustment in the G7 stock markets," Applied Economics, Taylor & Francis Journals, vol. 44(12), pages 1561-1582, April.
    8. Faria, João Ricardo & Mollick, André Varella & Sachsida, Adolfo & Wang, Le, 2012. "Do central banks affect Tobin's q?," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 1-10.
    9. Turuntseva, M. & Zyamalov, V., 2016. "Stock Markets under the Changing Terms of Trade," Journal of the New Economic Association, New Economic Association, vol. 31(3), pages 93-109.
    10. Junttila, Juha & Korhonen, Marko, 2011. "Utilizing financial market information in forecasting real growth, inflation and real exchange rate," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 281-301, April.
    11. Costello, Greg & Fraser, Patricia & Groenewold, Nicolaas, 2011. "House prices, non-fundamental components and interstate spillovers: The Australian experience," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 653-669, March.
    12. K. Cuthbertson & D. Nitzsche & S. Hyde, 2007. "Monetary Policy And Behavioural Finance," Journal of Economic Surveys, Wiley Blackwell, vol. 21(5), pages 935-969, December.
    13. Branston, Christopher B. & Groenewold, Nicolaas, 2004. "Investment and share prices: fundamental versus speculative components," The North American Journal of Economics and Finance, Elsevier, vol. 15(2), pages 199-226, August.
    14. Deimante Teresiene, 2009. "Lithuanian stock market analysis using a set of Garch models," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 10(4), pages 349-360, August.
    15. Velinov, Anton & Chen, Wenjuan, 2015. "Do stock prices reflect their fundamentals? New evidence in the aftermath of the financial crisis," Journal of Economics and Business, Elsevier, vol. 80(C), pages 1-20.
    16. Yen-Hsiao Chen & Patricia Fraser, 2010. "What drives stock prices? Fundamentals, bubbles and investor behaviour," Applied Financial Economics, Taylor & Francis Journals, vol. 20(18), pages 1461-1477.
    17. Harsh Purohit & Preeti Sharma, 2012. "Indian Mutual Fund Industry and the Variables Influencing to Invest in Mutual Fund Market: An Empirical Study of Investors Behaviour," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 3(3), pages 50-54, September.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E0 - Macroeconomics and Monetary Economics - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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