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- Title
Common Stock Prices--Further Observations on Causality: Comment.
- Authors
Hooks, Donald L.; Cheng, David C.
- Abstract
This note has a two-fold purpose: (a) it raises serious methodological and interpretative questions regarding K-K's application of the Sims test in this particular case; and (b) it suggests several alternative explanations for the poor forecasting ability of the published models cited above. <BR> The conclusion that only one of the three "explanatory" variables in K-K's test causes stock prices is probably erroneous. At best, they have shown that SP leads M and I, but lags P; however, even that finding may be due to spurious regressions caused by improper filtering of the time series. The distinction between causes and leads is the key to the proper interpretation of K-K's work, the filter problem aside. Their SP-M result is consistent with the efficient market structure, which implies that M does cause SP in the sense that most economists use the word. Of course, it is also consistent with the simultaneity structure; i.e., SP actually does cause M. Although the optimal control case is not easily resolved, it has been argued (Sims [18, 34]) that the lack of a consistent control policy over the sample period would tend to rule out this structure. <BR> We have also suggested several plausible alternative explanations for the forecast errors of the early models that motivate K-K's investigation into causality. The first of these--structural change--is intuitively appealing, but our work is only suggestive. A better test would be to reestimate the original models over two time periods.[7].
- Subjects
STOCK prices; INDUSTRIAL organization (Economic theory)
- Publication
Southern Economic Journal, 1978, Vol 45, Issue 1, p273
- ISSN
0038-4038
- Publication type
Article
- DOI
10.2307/1057635