Why is the importance of analyzing and conducting research on the correlation between the stock market valuation of securities (stocks, bonds, etc.) and the economic and financial situation of business entities growing?
In recent years, the importance of examining the correlation between stock market valuation of securities (stocks, bonds, etc.) and the economic and financial situation of business entities is growing, because there are more and more anomalies and speculations on capital markets, which may reduce these correlations. The importance of studying this issue is growing particularly when in certain listed markets valuations of certain financial assets and instruments are less and less related to economic fundamentals and the significance of speculation is growing. If such a lack of correlation between the stock market valuation and the economic and financial situation of business entities is growing, then the financial and / or economic crisis may occur. Such a situation of increase in speculative factors on stock exchanges and commodity exchange commodity markets appeared in 2006-2008 and contributed to the global financial crisis in 2008.
Do you agree with me on the above matter?
In the context of the above issues, I am asking you the following question:
Why is the importance of analyzing and conducting research on the correlation between the stock market valuation of securities (stocks, bonds, etc.) and the economic and financial situation of business entities growing?
Please reply
I invite you to the discussion
Thank you very much
Best wishes
Investor sentiment, which may be more informed and objective or different in perspective than economic models and estimations.
Speculation can only be short term.
Also reveals resilience to increasing risk factors.
Dear Dariusz
The literature demonstrating the positive correlation between stock market valuation and growth is quite extensive. Here are some cites with interesting findings:
Article Stock Markets, Growth, and Tax Policy
Article Growth Expectations and Stock Returns or Don''t Let an Earni...
https://www.jstor.org/stable/3665251?seq=1#metadata_info_tab_contents
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2008.01370.x
https://www.nber.org/papers/w7808
Higher correlation may come from spurious regression when both variables depend on a common risk factor, then we may find both variables we are interested in get some correlation in a specific situation facing. Common risk factor is not hard to find in macroeconomic issues or some specific corporate topics.
There are many biases in the decisions of investors trading in the financial market can lead to a lot of anomalies in the financial market such as bias of overconfidence and avoidance of loss and herd behavior and mental accounting and others, further complicated the forecasting processes through the technical analysis of the market
Indeed. That is the reason of spurious regression leading us. The market anomalies may due to insufficient understanding on every way from finance. For example, we already know that CCAPM is not sufficient to describe the real world doscount rate or IRR for many projects using macroeconomic risk viewpoint. But the production-based CAPM is still its infancy for two or three decades because of lack of data to pursue further understanding. The risk-return relation is always and everyewnere the big issue in finance. Or we could not evaluate the project well.
Hi,
Assuming rationality in markets, these two are (expected) co-related. In case the markets are more (and more) irrational, they are weakly correlated. Thus, correlation is important in either case.
Have you seen a paper written by Lu Zhang, The investment CAPM, published in European Financial Management, 2017? Maybe you would have different answers. To be honest, this is a puzzle to me. I think maybe CCAPM or PCAPM are both wrong with specific purposely perception. We still could not know the relation between risk and return well enough.
The will always be positive in a country where economy depend on financial market. Like in the case of United kingdom.
the importance of the correlation analysis between the stock market valuation and the economic situation of business entities growing becouse the relationship between them
The above discussion inspired me to the following considerations: Well, since the development of the deregulation process, the increase in the globalization of financial markets, the introduction to the financial markets of many derivatives without full supervision by financial supervision institutions, i.e. since the 1970s the frequency has increased and the scale of emerging financial and economic crises in various parts of the world. At the same time, perhaps the business cycles are increasingly influenced by the monetary policy of central banks and fiscal policies of governments mainly of the world's largest economies. The result may be a growing discrepancy, a growing disproportion between the macroeconomic situation and the situation of a particular national economy or global economy, including economic growth, etc., and the situation on capital markets, including securities markets.
What do you think about this topic?
What is your opinion on this topic?
Do you agree with me on the above matter?
In the context of the above issues, I am asking you the following question: Has the scale and instances of dissonance increased since the 1970s, and the disparity between the macroeconomic situation and the economic situation of a particular national or global economy, including economic growth, etc., and the situation on capital markets, including securities markets?
Please reply
I invite you to discussion
Thank you very much
Best wishes
Financial derivatives is an older topics with new meaning. In the 70's, the derivatives is in its baby steps among financial institutuions. Now lots of derivatives are traded in the trading house. Financial risk management has many new meanings today. We know lots of derivatives have different pricing tags in different time with different financial envioronment. There is no easy answer for above questions depending on what the specific issue people want to know. The only thing should be kept in mind is the derivatives originated from some specific target or stock has no value but hedging. With the purpose of hedging, the other side is a speculator or financial transaction promoter.
Dear Colleagues and Friends from RG,
In the context of the above discussion, other important issues arise that may be the basis for conducting the research. Therefore, based on the above considerations and discussion on the above issues, I formulated the following thesis that to a significant extent there is still a strong correlation between the economic and financial situation of the issuer of securities and the market valuation of certain issued and valued on the stock exchange.
In the context of this thesis, the following questions arise that may be the basis for conducting scientific research in this field:
- Has the scale of correlation between the economic and financial situation of the issuer of securities and the market valuation of these securities changed over the last several years?
- Has the anti-crisis central banking policy applied since autumn 2008, consisting in buying hundreds of billions of dollars worth of commercial assets from commercial banks, significantly improved the situation on the capital markets?
- Did the improvement of the situation on the capital markets caused by the anti-crisis policy of central banking caused the effect of higher indices on these markets than macroeconomic factors and the improvement of the economic and financial situation of issuers of these securities?
- Is it possible, therefore, to diagnose an increase in the reevaluation of these securities in the situation of analyzing the levels of stock indexes and comparing their level to the situation before 2008?
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