Actual and Warranted Relations between Asset Prices

27 Pages Posted: 28 Dec 2006 Last revised: 14 Dec 2022

See all articles by Andrea Beltratti

Andrea Beltratti

Bocconi University - Department of Finance

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Date Written: March 1991

Abstract

Efficient markets models assert that the price of each asset is equal to the optimal forecast of its ex-post (or fundamental) value, but the models do not imply that the covariances between prices equal the corresponding covariances of ex-post values. We present bounds for covariances and correlations of prices based on the covariance of ex-post values, and show how such bounds can be tightened using information about forecasting variables. The methods are used to examine the historical covariance between the U.S. and U.K. stock markers 1919-1989. The bounds on the covariance include the actual correlation.

Suggested Citation

Beltratti, Andrea and Shiller, Robert J., Actual and Warranted Relations between Asset Prices (March 1991). NBER Working Paper No. w3640, Available at SSRN: https://ssrn.com/abstract=471568

Andrea Beltratti (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Robert J. Shiller

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3708 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://www.econ.yale.edu/~shiller/

National Bureau of Economic Research (NBER) ( email )

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Yale University - International Center for Finance ( email )

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United States
203-432-3708 (Phone)
203-432-6167 (Fax)