New Evidence for the Present-Value Model of Stock Prices: Why the REH Version Failed Empirically

Roman Frydman, Michael Goldberg and Nicholas Mangee
Additional contact information
Roman Frydman: Department of Economics, New York University
Michael Goldberg: Peter T. Paul College of Business and Economics, University of New Hampshire

No 2, Working Papers Series from Institute for New Economic Thinking

Abstract: Shiller (1981) and others have shown that the quantitative predictions of the REH present-value model are inconsistent with time-series data on stock prices and dividends. In this paper, we assess the empirical relevance of the model without explicitly representing how a rational market participant forecasts dividends and interest rates. We find that stock prices are driven largely by news about fundamental factors. Moreover, this news moves prices through changes in the market’s forecasts of dividends and/or interest rates in ways that are remarkably consistent with the present-value model. We also find that the structure of the process underpinning stock prices undergoes quantitative change, and that both fundamental and psychological factors play an important role in this process. Taken together, Shiller’s findings and ours point to a novel explanation of the present-value model’s empirical difficulties. They also imply that macroeconomists and finance theorists should rethink how to represent rational forecasting in real-world markets.

JEL-codes: E44 G12 G14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-02
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published

Downloads: (external link)
https://www.ineteconomics.org/uploads/papers/WP2-Frydman.pdf (application/pdf)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2585690 First version, 2015 (text/html)

Related works:
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:thk:wpaper:2

DOI: 10.2139/ssrn.2585690

Access Statistics for this paper

More papers in Working Papers Series from Institute for New Economic Thinking Contact information at EDIRC.
Bibliographic data for series maintained by Pia Malaney ().