Stock Prices and Bond Yields: Can Their Comovements Be Explained in Terms of Present Value Models?

34 Pages Posted: 13 Nov 2007  

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Andrea Beltratti

Bocconi University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 1990

Abstract

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.

Suggested Citation

Shiller, Robert J. and Beltratti , Andrea, Stock Prices and Bond Yields: Can Their Comovements Be Explained in Terms of Present Value Models? (October 1990). NBER Working Paper No. w3464. Available at SSRN: https://ssrn.com/abstract=471491

Robert J. Shiller (Contact Author)

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Yale University - International Center for Finance ( email )

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HOME PAGE: http://www.econ.yale.edu/~shiller/

Andrea Beltratti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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