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Do stock prices reflect their fundamentals? New evidence in the aftermath of the financial crisis

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  • Velinov, Anton
  • Chen, Wenjuan

Abstract

We re-examine the dynamic relations between stock prices and macroeconomic fundamentals for six major industrialized countries in the wake of the recent financial crisis. Our analysis is based on a structural vector autoregressive (SVAR) model, which relies on a long-run restriction to identify fundamental and non-fundamental shocks to stock prices. This paper is the first in this line of literature to formally test the identifying restriction. We do so by means of a Markov switching-SVAR (MS-SVAR) model in heteroskedasticity. We generally find that it is supported by the data. Our structural analysis shows that after the 2008 financial crisis, stock prices tend to fall in line with their fundamentals for all six countries investigated. In general, we observe a self-correction of stock prices towards their fundamental values.

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  • Velinov, Anton & Chen, Wenjuan, 2015. "Do stock prices reflect their fundamentals? New evidence in the aftermath of the financial crisis," Journal of Economics and Business, Elsevier, vol. 80(C), pages 1-20.
    • Handle: RePEc:eee:jebusi:v:80:y:2015:i:c:p:1-20
    DOI: 10.1016/j.jeconbus.2015.02.001
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    Cited by:

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    6. Justyna Wr'oblewska & {L}ukasz Kwiatkowski, 2024. "Identification of structural shocks in Bayesian VEC models with two-state Markov-switching heteroskedasticity," Papers 2406.03053, arXiv.org, revised Jun 2024.
    7. Miyakoshi, Tatsuyoshi & Tsukuda, Yoshihiko & Shimada, Junji, 2016. "Magnitudes of Market Inefficiency: Theory and Application," Japan and the World Economy, Elsevier, vol. 39(C), pages 23-36.
    8. Podstawski, Maximilian & Velinov, Anton, 2018. "The state dependent impact of bank exposure on sovereign risk," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 63-75.
    9. Velinov, Anton, 2018. "On the importance of testing structural identification schemes and the potential consequences of incorrectly identified models," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 2(1), pages 106-126.
    10. Willem Thorbecke, 2021. "The weak rupiah: catching the tailwinds and avoiding the shoals," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 23(3), pages 521-539, December.
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    14. Ivan Mendieta-Munoz & Mengheng Li, 2019. "The Multivariate Simultaneous Unobserved Compenents Model and Identification via Heteroskedasticity," Working Paper Series, Department of Economics, University of Utah 2019_06, University of Utah, Department of Economics.
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    16. Ahmed, Walid M.A., 2020. "Corruption and equity market performance: International comparative evidence," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
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    More about this item

    Keywords

    Markov switching model; Structural vector autoregression; Heteroskedasticity; Stock price fundamentals;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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