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

Liam Gallagher

Applied Financial Economics, 1999, vol. 9, issue 2, 129-142

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.

Date: 1999
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DOI: 10.1080/096031099332393

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