Stock Prices: Nominal vs. Real Shocks

Stock Prices: Nominal vs. Real Shocks
Author: Gikas A. Hardouvelis
Journal: FinanzMarkt und Portfolio Management, Jahrgang 1988, 2: 10-18

Abstract: The impressive increase in stock prices during the 1980s, their subsequent October 1987 worldwide crash, their large daily fluctuations, and the historically high trading volumes have recently spurred new interest in the forces underlying stock price movements. The question typically asked is: ‘Do stock prices respond appropriately to new information about economic
conditions? This article attempts to answer part of this question. It examines the direction of the stock price responses to different types of economic news and assesses the consistency of these responses with the predictions of Finance theory. Section 2 discusses the fundamental determinants of stock price movements. Section 3 reviews the academic literature that attempts to
explain an observed anomalous relationship between stock prices and one of their fundamental determinants, inflation. Section 4 presents the empirical methodology, which involves an analysis of the immediate response of stock prices to announcements of economic variables. Section 5 analyzes the empirical evidence and section 6 summarizes the principal findings.

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