Variation of Share Prices Due to Fundamental and Non-Fundamental Innovations

Abstract

This paper examines the deviation of Australian stock prices from their fundamentals by decomposing stock price into four fundamental components and one non-fundamental component in three multivariate-moving-average models. The four components of stock prices, earnings, dividends, interest rates and excess stock returns are identified by the restrictions imposed on a SimsBernanke variance decomposition. Overall our findings suggest that, the stock price variability is only partially explained by fundamental factors as earnings and dividends, the rest can be due to time-varying interests and future excess stock returns. This conclusion further confirms the refection of simple present value model in determining stock price on the base of results from a time series dynamic framework.