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What Drives Stock Prices? Identifying the Determinants of Stock Price Movements
Author(s) -
Balke Nathan S.,
Wohar Mark E.
Publication year - 2006
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2006.tb00757.x
Subject(s) - dividend , stock (firearms) , economics , stock price , econometrics , cost price , financial economics , stock market bubble , common stock , monetary economics , stock market , series (stratigraphy) , finance , biology , mechanical engineering , paleontology , context (archaeology) , horse , engineering
In this paper, we show that the data have difficulty distinguishing a stock price decomposition in which expectations of future real dividend growth is a primary determinant of stock price movements from one in which expectations of future excess returns are a primary determinant. The data cannot distinguish between these very different decompositions because movements in the price‐dividend ratio are very persistent whereas neither real dividend growth nor excess returns are; most of the information about low‐frequency movements in dividend growth and excess returns is contained in stock prices and not the series themselves. We further show that this inability to identify the source of stock price movements is not solely due to poor power and size properties of our statistical procedure, nor does it appear to be due to the presence of a rational bubble.