Working Paper: NBER ID: w2846
Authors: Robert J. Shiller
Abstract: Simple efficient markets models imply that the covariance between prices of speculative assets cannot exceed the covariance between their respective fundamentals unless there is positive information pooling. Positive information pooling occurs when there is more information, in a sense defined here, about the aggregate of the fundamentals than there is about the individual fundamentals. With constant discount rates, the covariance between prices (detrended by dividing by a moving average of lagged dividends) in the U. K. and the U. S. exceeds the covariance of the measure of fundamentals, and there is no evidence of positive information pooling. Regression tests of forecast errors in one country on a real price variable in another country show significantly negative coefficients. When the present value formula uses short rates to discount, there is less evidence of excess comovement.
Keywords: stock prices; dividends; efficient markets; comovements
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| covariance of stock prices (G17) | covariance of fundamentals (C10) |
| shared information about future dividends (G35) | covariance of stock prices (G17) |
| information pooling (D70) | covariance between stock prices (C10) |
| variance of stock prices (G17) | average covariance of individual stocks (C10) |
| negative information pooling (D79) | error terms of predictions regarding prices and dividends (G17) |