Stock market prices : determinants and consequences
This thesis concludes that aggregate stock market prices are significantly linked to the real economy. The thesis does, however, find a number of instances of non-efficient market behaviour, in terms of unexplained stock returns prior to financial crises, the predictability of the equity premium, and, possibly, the weak statistical relationship between stock market prices and corporate investment. Chapter I examines stock price behaviour prior to the stock market crash of 1987. Using data from 23 stock markets, there is little support for the view that the recent crash was caused by a bursting bubble. However, there is evidence that equity prices have recently moved in a non-random manner on some of these exchanges. Chapter II investigates the movements of stock prices in the United Kingdom from 1700 to 1987. A strong nominal interest rate effect on excess returns is found for the entire period, but it appears that inflation has a consistent, negative effect only after 1950. Chapter III analyzes major British financial crises since 1700. Using efficient and non-efficient market models, it is found that fluctuations in macroeconomic variables account for up to one half of equity price variation. As well, relatively few crises have been preceded by the excessive positive returns consistent with rational bubbles. Chapter IV finds that Tobin's Q in OECD countries is inappropriately modelled within a static framework but is improved markedly using a dynamic error correction model. The Q measures are also superior to real stock prices as predictors of investment. Chapter V compares the effects of equity prices on corporate investment and output in Japan, West Germany, the United Kingdom and the United States. It seems that the effect of the equity market is greater in the latter two countries for various institutional reasons associated with managerial autonomy.