How important are fundamentals?—Evidence from a structural VAR model for the stock markets in the US, Japan and Europe

Int. Fin. Markets, Inst. and Money 14 (2004) 185–201

This paper presents a bivariate structural VAR model which includes growth rates of industrial production and stock prices. Analyzing data from 1960 to 1999 we find that real activity shocks only explain a small fraction of the variability in real stock prices in the US, Japan and an aggregate European economy since the early 1980s, while they explain a substantial proportion over the 1960s and 1970s in all areas. The results provide additional evidence for the existence of speculative bubbles over the 1980s and 1990s.

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