Journal of Financial and Quantitative Analysis Vol. 33 No. 1 1998
Permanent, Temporary, and Non-Fundamental Components of Stock Prices
Abstract
This paper identifies various components of stock prices and examines the response of stock prices to different types of shocks: permanent and temporary changes in earnings and dividends, changes in discount factors, and non-fundamental factors. The analysis is conducted in a log-linear structural VAR framework. I find that about half of the yearly variation in prices is not related to either earnings or dividend changes. Time-varying interest rates do not help explain the remaining price movements. However, time-varying excess stock returns (i.e., risk premiums) account for much of the remaining variation in stock prices, in particular, in the postwar period. As a result, the deviation of stock prices from these fundamentals reduces to about 10% of stock price movements and tends to persist for a while before it declines eventually. This finding seems more compatible with a fad rather than a bubble interpretation.
- DOI
- 10.2307/2331376
- Volume
- 33
- Issue
- 1
- Pages
- 1
- Sources
- openalex crossref