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Actual and Warranted Relations Between Asset Prices

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  • Andrea E. Beltratti
  • Robert J. Shiller

Abstract

Efficient markets models assert that the price of each asset is equal to the optimal forecast of its ex-post (or fundamental) value, but the models do not imply that the covariances between prices equal the corresponding covariances of ex-post values. We present bounds for covariances and correlations of prices based on the covariance of ex-post values, and show how such bounds can be tightened using information about forecasting variables. The methods are used to examine the historical covariance between the U.S. and U.K. stock markers 1919-1989. The bounds on the covariance include the actual correlation.

Suggested Citation

  • Andrea E. Beltratti & Robert J. Shiller, 1991. "Actual and Warranted Relations Between Asset Prices," NBER Working Papers 3640, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3640
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    References listed on IDEAS

    as
    1. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    2. Shiller, Robert J. & Beltratti, Andrea E., 1992. "Stock prices and bond yields : Can their comovements be explained in terms of present value models?," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 25-46, October.
    3. Robert S. Pindyck & Julio J. Rotemberg, 1990. "Do Stock Prices Move Together Too Much?," NBER Working Papers 3324, National Bureau of Economic Research, Inc.
    4. repec:bla:jfinan:v:44:y:1989:i:3:p:719-730 is not listed on IDEAS
    5. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, vol. 100(403), pages 1173-1189, December.
    6. repec:bla:jfinan:v:44:y:1989:i:3:p:719-29 is not listed on IDEAS
    7. Robert J. Shiller, 1989. "Comovements in Stock Prices and Comovements in Dividends," Journal of Finance, American Finance Association, vol. 44(3), pages 719-729, July.
    8. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    9. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-933, July.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Dumas, Bernard & Harvey, Campbell R. & Ruiz, Pierre, 2003. "Are correlations of stock returns justified by subsequent changes in national outputs?," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 777-811, November.
    2. Shiller, Robert J. & Beltratti, Andrea E., 1992. "Stock prices and bond yields : Can their comovements be explained in terms of present value models?," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 25-46, October.
    3. Shiller, Robert J., 1995. "Aggregate income risks and hedging mechanisms," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 119-152.
    4. Tsutsui, Yoshiro & Hirayama, Kenjiro, 2004. "Are international portfolio adjustments a cause of comovements in stock prices?," Pacific-Basin Finance Journal, Elsevier, vol. 12(4), pages 463-478, September.
    5. J. Bradford De Long & Richard Grossman, 1992. "Excess Volatility on the London Stock Market, 1870-1990," J. Bradford De Long's Working Papers _133, University of California at Berkeley, Economics Department.
    6. Lund, Jesper & Engsted, Tom, 1996. "GMM and present value tests of the C-CAPM: evidence from the Danish, German, Swedish and UK stock markets," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 497-521, August.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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