Actual and Warranted Relations Between Asset Prices

Andrea E. Beltratti and Robert Shiller

No 970, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Efficient markets models assert that the price of each asset is equal to the optimal forecast of its ex-post or fundamental value. These models do not imply, however, that the covariance between two asset prices is given by the covariance between the ex-post values they respectively forecast: these two covariances can even have opposite signs. However, it is possible to place bounds on the covariance between asset prices given the covariance matrix of ex-post values. We present such bounds for both covariances and correlations and show how such bounds can be tightened using information beyond the covariance matrix of ex-post values. The methods are used to examine whether the historical correlation between the U.S. and U.K. stock markets 1919-1989 is warranted. The bounds on the warranted covariance are very wide and include the actual correlation.

Keywords: Volatility; stock market; asset pricing; efficient markets; information (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Pages: 22 pages
Date: 1991-02
Note: CFP 859.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Oxford Economic Papers (1993), 45: 387-402

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d09/d0970.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Actual and Warranted Relations between Asset Prices (1993)
Working Paper: Actual and Warranted Relations Between Asset Prices (1991)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:970

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().