TAILIEUCHUNG - Do Japanese Stock Prices Reflect Macro Fundamentals?

The . reform initiative addresses the fundamental problems arising from the use of proportionate property interests in fungible bulks, and proposes the introduction of a new concept: the "securities entitlement" or SE. The SE is a sui generis property interest that would replace the proportionate property interest in situations where an intermediary holds a fungible bulk of securities on behalf of others. The SE would be defined by a comprehensive set of rules stating the obligations of the intermediary and the rights of the owner of the SE. The. | SFB 649 Discussion Paper 2012-037 Do Japanese Stock Prices Reflect Macro Fundamentals Wenjuan Chen Anton Velinov Humboldt-Universitat zu Berlin Germany European University Institute SFB 6 4 9 E C O N O M I C R I S K B E R L I N This research was supported by the Deutsche Forschungsgemeinschaft through the SFB 649 Economic Risk . http ISSN 1860-5664 SFB 649 Humboldt-Universitat zu Berlin Spandauer StraBe 1 D-10178 Berlin Do Japanese Stock Prices Reflect Macro Fundamentals Wenjuan Chen Anton Velinov Freie Universitat Berlin European University Institute Email Email May 18 2012 Abstract This paper investigates to what extent the fundamentals of the real economy are reflected in the stock prices of Japan. A Markov switching VAR model with switching variances is used to test the structural identification scheme. Identification of fundamental and nonfundamental shocks is shown to be supported by the data. Based on the appropriate structural restriction the historical stock prices are decomposed into fundamental components and nonfundamental components. The decomposition shows that the linkage between Japanese stock prices and real activity shocks became strengthened since the bubble collapsed in the beginning of 1990s. Keywords Stock price real activity financial crisis structural restrictions JEL classifications G12 E23 Support by the Deutsche Forschungsgemeinschaft through the CRC 649 Economic Risk is greatly acknowledged. We thank Helmut Luetkepohl Dieter Nautz Christian Offermanns Juergen Wolters and participants of the 2011 DIW Macroeconometric Workshop for their helpful comments. 1 1 Introduction There is an ongoing controversy regarding the extent to which stock prices reflect fundamental values. Earlier literature such as Shiller 1981 found that the . stock prices were much more volatile than their subsequent changes in dividends. More recently Binswanger 2004 shows evidence that stock .

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