Liam A. Gallagher

The stock return–inflation puzzle revisited

Abstract We develop a theoretical model to formalize and derive testable implications of Fama’s [American Economic Review 71 (1981) 545] ‘proxy hypothesis’ explanation of the stock return–inflation puzzle. Using a multivariate innovation decomposition, the evidence provides strong confirmation of the proxy hypothesis explanation of the puzzle in the US over the last 40 years.

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

This paper outlines a simple macro model with overlapping wage contracts to investigate how the temporary and permanent components of stock price movements may be related to aggregate macroeconomic supply and demand disturbances. In the content of the model, we show that aggregate demand shocks have only temporary effects on real stock prices, while supply shocks may affect the level of real stock prices permanently. Moreover, the temporary component in U.S. stock prices, identified by placing appropriate structural restrictions on a vector autoregressive system estimated for the postwar period, is statistically significant. This evidence supports the mean-reversion hypothesis that stock prices are not pure random walks. The finding is robust to the choice of variables used in the vector autoregressive system and periodicity.

Dynamic almost ideal demand systems: an empirical analysis of alcohol expenditure in Ireland

This paper presents a dynamic form of the Almost Ideal Demand System (AIDS). Three versions of the static AIDS model are employed to determine the preferred long-run equilibrium model and represents the short-run dynamics by an error correction mechanism. This estimation procedure is then applied to alcohol expenditure in Ireland. The estimated point elasticities are consistent with previous studies and a priori expectations. Beer and spirits are found to be price inelastic in both the short and long run. While wine is price inelastic in the short run and price elastic in the long run.

Measuring the temporary component of stock prices: robust multivariate analysis

Abstract We identify the temporary and permanent components of US stock prices through appropriate restrictions on a vector autoregression of real stock returns and changes in interest rates, employing alternative robust estimation procedures designed to allow for non-Gaussian innovations.

A multi-country analysis of the temporary and permanent components of stock prices

The paper investigates the mean-reverting components in real stock prices for 16 countries. The temporary and permanent components of real stock prices are identified through appropriate restrictions on a vector autoregression of real stock returns and inflation. The multivariate time series technique identifies the size and significance of the mean-reverting component. The evidence supports the mean-reversion hypothesis that stock prices are not random walks. A significant temporary component in real stock prices of magnitude between 7 and 64% of the variation of quarterly real stock price movements is found. For a number of countries there is evidence of persistence in the temporary component.

Macroeconomic shocks under alternative exchange rate regimes: the Irish experience

The paper investigates the nature of Irish macroeconomic shocks and their correlation with German and UK shocks. A restricted VAR of real output and prices is employed to distinguish aggregate demand and supply shocks for the three countries. To identify the role of Irish exchange rate policy two periods are considered: the preERM period and the ERM period. The results indicate that while the change in exchange rate policy had an effect on the nature of demand and supply shocks, the ERM did not have the effect of increasing the correlation of Irish shocks with Germany or the UK. Evidence of substantial asymmetric shocks with Germany and the UK exist. Thus, Ireland as a member of the EMU faces increased cost of adjustment to asymmetric macroeconomic shocks.

Estimating the Mean-Reverting Component in Stock Prices: A Cross-Country Comparison

This paper investigates the mean-reverting component in stock prices for sixteen countries using a Kalman filter maximum likelihood estimation procedure to measure the transitory, permanent, and seasonal components. Evidence is provided supporting the mean reversion hypothesis that stock prices are not pure random walks: a statistically significant mean-reverting component is found in each countrys stock prices. Nevertheless, for twelve of the sixteen countries, the transitory component does not explain more than five percent of the variation in stock prices. Copyright 1997 by Scottish Economic Society.

Performance of Spanish pension funds: robust evidence from alternative models

This article investigates the performance of Spanish pension funds using a range of linear and nonlinear performance models. As the sample presents characteristics of higher-order moments, traditional performance measures are distorted. We generate alternative performance models which include higher-order risk factors that model skewness and kurtosis; factors that capture nonlinearity inherent in some of the underlying assets used in pension funds. The results suggest that Spanish pension funds exhibit positive market timing and selectivity ability. Moreover, this positive performance is robust to the model used to adjust performance for risk, including the higher-order risk factors. The stronger performing pension funds have a higher exposure to size and book-to-market risk. Also, small-sized funds and funds with less volatility exhibit stronger performance.

Real and Nominal Shocks to Exchange Rates: Does the Regime Matter?

This paper investigates the source of Irish real and nominal exchange rate movements during the ERM period. A restricted VAR is employed to decompose Irish pound exchange rate movements into changes due to real and nominal factors, for three bilateral exchange rates--sterling-Irish pound, mark-Irish pound and dollar-Irish pound. The pattern of nominal exchange rate overshooting in response to nominal shocks and the relative importance of nominal shocks as drivers of nominal exchange rates differs between the flexible regime (sterling-Irish pound and dollar-Irish pound) and the target zone arrangement (mark-Irish pound). In contrast real shocks predominantly explain variations in real exchange rates and are independent of the exchange rate regime. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester