US stock prices and macroeconomic fundamentals
Black, Angela; Fraser, Patricia; Groenewold, Nicolaas
Using 54 years 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 ofUS 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.
Conference: University of Otago, Finance department, Seminar, Room 2.07, University of Otago, Dunedin, Otago
Keywords: VAR model; stock prices; fundamental price-output ratio; actual values