This paper sheds light on US stock price deviations from fundamentals by analyzing the time-series dynamics of post-1870 S&P valuation ratios. It employs a non-linear, two-regime framework that allows for different behavior over phases of the stock market cycle. Persistence in the ratios implies prolonged price deviations from fundamentals stemming from short run continuation fueled by investor sentiment during bull markets. However, the pull from fundamentals ensures that valuation ratios and prices move toward their equilibrium levels in bear markets. Impulse response functions highlight sluggish adjustment and indicate that the effects of positive shocks are more pronounced and long-lasting in bull markets. The main conclusion is that, while market sentiment plays an important transitory role, valuation ratios do mean revert and so prices reflect fundamentals in the long run.

This paper investigates the short-term price behaviour of closed-end funds following eight large market-wide shocks. The findings, from a sample of 63 funds continuously traded on the London Stock Exchange, indicate that prices overreact relative to equilibrium given by net asset values. The speed of reversion in discounts following market-wide shocks is slower than that following fund-specific shocks of a similar magnitude. The post-shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity, as proxied by fund size, or to the speed of recovery in the broader market. The discount decays more slowly for those funds that are difficult to arbitrage.