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US Stock Prices and Macroeconomic Fundamentals

  • Angela Black
  • Patricia Fraser

    (Aberdeen Asset Management Professor of Finance and Investment Management)

  • Nicolaas Groenewold

    (Department of Economics, The University of Western Australia)

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.

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File URL: http://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/2001/01-08.pdf
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Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 01-08.

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Length: 39 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:uwa:wpaper:01-08
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Web page: http://www.business.uwa.edu.au/school/disciplines/economics

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  20. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  21. Gjerde, Oystein & Saettem, Frode, 1999. "Causal relations among stock returns and macroeconomic variables in a small, open economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(1), pages 61-74, January.
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  28. Hess, Patrick J & Lee, Bong-Soo, 1999. "Stock Returns and Inflation with Supply and Demand Disturbances," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1203-18.
  29. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
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