Do stock prices move together too much?
We show that comovements of individual stock prices cannot be justified by economic fundamentals. This finding is a rejection of the present value model of security valuation. Unlike other tests of this model, ours is robust in that it allows for volatility in ex ante rates of return. The only const...
| Main Authors: | , |
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| Format: | Working Paper |
| Published: |
MIT Center for Energy and Environmental Policy Research
2009
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| Online Access: | http://hdl.handle.net/1721.1/50141 |
| _version_ | 1826209029660082176 |
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| author | Pindyck, Robert S. Rotemberg, Julio |
| author_facet | Pindyck, Robert S. Rotemberg, Julio |
| author_sort | Pindyck, Robert S. |
| collection | MIT |
| description | We show that comovements of individual stock prices cannot be justified by economic fundamentals. This finding is a rejection of the present value model of security valuation. Unlike other tests of this model, ours is robust in that it allows for volatility in ex ante rates of return. The only constraint we impose is that investors' utilities are functions of a single consumption index. This implies that changes in discount rates must be related to changes in macroeconomic variables, and hence stock prices of companies in unrelated lines of business should move together in response to changes in current or expected future macroeconomic conditions. We also show that this constraint implies that any priced factors in the APT model must be related to macroeconomic variables. Hence our results are also a rejection of the APT, so constrained. |
| first_indexed | 2024-09-23T14:16:32Z |
| format | Working Paper |
| id | mit-1721.1/50141 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T14:16:32Z |
| publishDate | 2009 |
| publisher | MIT Center for Energy and Environmental Policy Research |
| record_format | dspace |
| spelling | mit-1721.1/501412019-04-11T05:55:20Z Do stock prices move together too much? Pindyck, Robert S. Rotemberg, Julio We show that comovements of individual stock prices cannot be justified by economic fundamentals. This finding is a rejection of the present value model of security valuation. Unlike other tests of this model, ours is robust in that it allows for volatility in ex ante rates of return. The only constraint we impose is that investors' utilities are functions of a single consumption index. This implies that changes in discount rates must be related to changes in macroeconomic variables, and hence stock prices of companies in unrelated lines of business should move together in response to changes in current or expected future macroeconomic conditions. We also show that this constraint implies that any priced factors in the APT model must be related to macroeconomic variables. Hence our results are also a rejection of the APT, so constrained. Supported by the International Financial Services Research Center at MIT, the MIT Center for Energy Policy Research and the National Science Foundation. 2009-12-15T23:52:37Z 2009-12-15T23:52:37Z 1990 Working Paper 90-008 http://hdl.handle.net/1721.1/50141 28596050 Working paper (Massachusetts Institute of Technology. Center for Energy Policy Research) ; MIT-CEPR 90-008. 26 p application/pdf MIT Center for Energy and Environmental Policy Research |
| spellingShingle | Pindyck, Robert S. Rotemberg, Julio Do stock prices move together too much? |
| title | Do stock prices move together too much? |
| title_full | Do stock prices move together too much? |
| title_fullStr | Do stock prices move together too much? |
| title_full_unstemmed | Do stock prices move together too much? |
| title_short | Do stock prices move together too much? |
| title_sort | do stock prices move together too much |
| url | http://hdl.handle.net/1721.1/50141 |
| work_keys_str_mv | AT pindyckroberts dostockpricesmovetogethertoomuch AT rotembergjulio dostockpricesmovetogethertoomuch |