UNSPECIFIED (2002) Permanent and temporary components of stock prices: Evidence from assessing macroeconomic shocks. SOUTHERN ECONOMIC JOURNAL, 69 (2). pp. 345-362. ISSN 0038-4038

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Abstract

This paper outlines a simple macro model with overlapping wage contracts to investigate how the temporary and permanent components of stock price movements may be related to aggregate macroeconomic supply and demand disturbances. In the content of the model, we show that aggregate demand shocks have only temporary effects on real stock prices, while supply shocks may affect the level of real stock prices permanently. Moreover, the temporary component in U.S. stock prices, identified by placing appropriate structural restrictions on a vector autoregressive system estimated for the postwar period, is statistically significant. This evidence supports the mean-reversion hypothesis that stock prices are not pure random walks. The finding is robust to the choice of variables used in the vector autoregressive system and periodicity.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	SOUTHERN ECONOMIC JOURNAL
Publisher:	UNIV NORTH CAROLINA
ISSN:	0038-4038
Date:	October 2002
Volume:	69
Number:	2
Number of Pages:	18
Page Range:	pp. 345-362
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/10485

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