Variation of Share Prices Due to Fundamental and Non-Fundamental Innovations
43 Pages Posted: 11 May 2001
Date Written: undated
This paper examines the deviation of Australian stock prices from their fundamentals by decomposing stock price into four fundamental components and one non-fundamental component in three multivariate-moving-average models. The four components of stock prices, earnings, dividends, interest rates and excess stock returns are identified by the restrictions imposed on a Sims-Bernanke variance decomposition. Overall our findings suggest that, the stock price variability is only partially explained by fundamental factors as earnings and dividends, the rest can be due to time-varying interests and future excess stock returns. This conclusion further confirms the refection of simple present value model in determining stock price on the base of results from a time series dynamic framework.
Keywords: Fundamentals, Sims-Bernanke Variance Decomposition, Trivariate Moving Average Representation
JEL Classification: G12
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