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A multi-country analysis of the temporary and permanent components of stock prices

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  • Liam Gallagher

Abstract

The paper investigates the mean-reverting components in real stock prices for 16 countries. The temporary and permanent components of real stock prices are identified through appropriate restrictions on a vector autoregression of real stock returns and inflation. The multivariate time series technique identifies the size and significance of the mean-reverting component. The evidence supports the mean-reversion hypothesis that stock prices are not random walks. A significant temporary component in real stock prices of magnitude between 7 and 64% of the variation of quarterly real stock price movements is found. For a number of countries there is evidence of persistence in the temporary component.

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  • Liam Gallagher, 1999. "A multi-country analysis of the temporary and permanent components of stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 129-142.
    • Handle: RePEc:taf:apfiec:v:9:y:1999:i:2:p:129-142
    DOI: 10.1080/096031099332393
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    3. James Hansen, 2011. "Does Equity Mispricing Influence Household and Firm Decisions?," RBA Research Discussion Papers rdp2011-06, Reserve Bank of Australia.
    4. Thierry Ane, 2006. "Short and long term components of volatility in Hong Kong stock returns," Applied Financial Economics, Taylor & Francis Journals, vol. 16(6), pages 439-460.
    5. Narayan, Paresh Kumar & Thuraisamy, Kannan S., 2013. "Common trends and common cycles in stock markets," Economic Modelling, Elsevier, vol. 35(C), pages 472-476.
    6. John Cotter, 2004. "Downside risk for European equity markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 707-716.
    7. Araújo, Eurilton, 2009. "Macroeconomic shocks and the co-movement of stock returns in Latin America," Emerging Markets Review, Elsevier, vol. 10(4), pages 331-344, December.
    8. Patricia Fraser & Nicolaas Groenewold, 2003. "US Share Prices and Real Supply and Demand Shocks," Economics Discussion / Working Papers 03-19, The University of Western Australia, Department of Economics.

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