Stock Prices and Bond Yields: Can Their Comovements Be Explained in Terms of Present Value Models?
Robert J. Shiller
Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance
Bocconi University - Department of Finance
NBER Working Paper No. w3464
Real stock prices seem to overreact to changes in long-term interest rates. That is, real stock prices drop when long-term interest rates rise (and rise when they fall) more than would be implied by a rational expectations present value model where expectations are based on a vector autoregression. This overreaction is not associated with any overreaction to changes in the short-run inflation rate. Over the last century real stock prices have shown little reaction to changes in inflation rates, and according to the model they should show little reaction. These conclusions were reached from an analysis of annual data in the united states 1871 to 1989 and the united Kingdom 1918 to 1989.
Number of Pages in PDF File: 34
Date posted: November 13, 2007