Excess U.S. Equity Returns: Are They Determined by Fundamental or Behavioral Variables?

34 Pages Posted: 20 Aug 2007

See all articles by Ramaprasad Bhar

Ramaprasad Bhar

UNSW Business School, Risk and Actuarial Studies

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Date Written: August 2007

Abstract

This paper considers several important macroeconomic variables such as inflation, federal funds rates and unemployment along with behavioral variables such as momentum trading to explain excessive U.S. equity returns during the post World War II era. The theoretical hypotheses propose three regimes of economic conditions that give rise to excessive equity prices. Periods of excessive returns most often are followed by periods of below average returns. However, occasionally, periods of excessive returns are followed by even higher excessive returns with subsequent crashes. Such higher excessive returns are commonly referred to as booms or bubbles. We formulate and test certain hypotheses that attribute excessive equity returns initially to economic fundamentals and subsequently to behavioral variables. We use a 3-state regime Markov switching methodology to capture the specific fundamental and behavioral factors that drive equity prices across business cycles.

Keywords: Excessive stock returns, macroeconomic variables, Regimes, Business cycle

JEL Classification: C22, E44, G12

Suggested Citation

Bhar, Ramaprasad and Malliaris, A. (Tassos) G., Excess U.S. Equity Returns: Are They Determined by Fundamental or Behavioral Variables? (August 2007). Available at SSRN: https://ssrn.com/abstract=1008202 or http://dx.doi.org/10.2139/ssrn.1008202

Ramaprasad Bhar (Contact Author)

UNSW Business School, Risk and Actuarial Studies ( email )

Sydney, NSW 2052
Australia

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

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