Equity Price Variation in Pacific Basin Countries
Posted: 24 Aug 1998
This paper uses a multivariate procedure to measure two sources of real return variation in the Pacific Basin equity markets: the expected return variables and shocks to expected future cash flows. While the global instrumental variables that proxy for these two sources of variation explain individual stock index real returns reasonably well, their explanatory power for portfolio real returns is much stronger. Our evidence thus suggests market rationality of stock price movements in the Pacific Basin countries. We further find that expected future cash flow shocks are better at explaining quarterly real returns than do expected-return variables. Results also show that U.S. future industrial growth rates have a significantly stronger impact on the Pacific Basin Stock return movements than do the Japanese.
JEL Classification: G12, G15
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