Do U.S. Stock Prices Deviate from Their Fundamental Values?: Some New Evidence

摘要: We propose a new methodology to test Fama's (1991) contention that the present value model (PVM) should be augmented by time-varying expected inflation more adequately account for actual stock price behavior. Unlike other methods, our testing approach can distinguish between excess-price movement hypothesis of Shiller (1981) and dividend-smoothing Marsh Merton (1986). decompose levels (as opposed variances) prices into their fundamental non-fundamental elements in context multivariate PVM cointegrating framework utilize Gonzalo Granger (1995) procedure formally statistical significance component. Our results from monthly data post-WWII period do not support inflation-augmented since component continues achieve significance. This finding persists under alternative specifications frequencies. The apparent failure traditional, rational-expectation, observed market behavior provides another piece evidence supportive Shiller's belief some form "irrationality".