Permanent and Temporary Components of Stock Prices: Evidence from Assessing Macroeconomic Shocks

US share prices and real supply and demand shocks

“…2 The Hess and Lee (1999) model achieved nominal inertia by unaccountably including the lagged interest rate in their price equation while Gallagher and Taylor (2002b) include profits (a real flow variable) in the price equation with a unit coefficient, a feature which appears necessary to ensure that there are short-run effects of monetary shock on the price level. 3 We can think of these shock as changes in preferences for shares or a change in risk aversion, provided the shock does not have a direct effect on the rest of the model.…”

“…While in the BQ model nominal inertia comes from a form of Taylor's (1980) staggered wage-setting scheme, we do not model wage-setting explicitly but capture the inertia by positing a Phillips-Curve-like relationship between the price level on the one hand and pressure in the labour market and the lagged price level on the other hand. Alternative formulations are in Hess and Lee (1999) and in Gallagher and Taylor (2002b) but both of these have some unusual features which we wish to avoid.…”

“…In Gallagher and Taylor (2002a) the focus is, like Hess and Lee (1999), on the stock-price-inflation puzzle which is analysed in a model containing only these two variables. In Gallagher and Taylor (2002b) the model is again a two-variable VAR in inflation and stock returns which is used to decompose stock prices into temporary and permanent parts using the Blanchard and Quah procedure. In the latter paper, however, the restrictions used for identification are based on a simple macroeconomic model which allows the distinction between demand-and supply-driven components of inflation.…”

Fiscal Deficits and Stock Prices in India: Empirical Evidence

“…Fama and Schwert [26], Schwert [27], Fama [28], Quayes and Jamal [29], Gallagher and Taylor [30,31], Rapach [32], and Feldstein [33] have shown that inflation can have a negative impact on stock prices in industrialized countries, but Al-Khazali and Pyun [34] and Spyrou [35] showed that such a negative relationship may not hold true for emerging economies. However, some studies from Pearce and Roley [36] and Hardouvelis [37] found no significant relationship between the two variables.…”

Stock market prediction with multiple classifiers

“….there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis". However, most recent studies [7][8][9][10] on stock markets reject the random walk behavior of stock prices. In a review, Fama [2] even states that the efficient market hypothesis surely must be false.…”