Determinants of the value of common stocks in the U.S.: An econometric analysis for the period 1968-1988

The study tested three types of models, i.e. financial, macroeconomic, and the combined financial-macroeconomic model (FINMAC), an aggregation of the expanded Gordon model and the IS-LM model. This was done to determine the impact of certain financial and macroeconomic variables on stock prices using the S & P composite, industrial, utility, financial, and transportation stock price indices. The models were tested in two ways: first, in five sub-periods and second for the entire 1968-1988 period.; The results of the tests varied considerably in different sub-periods and in various stock price indices. Some of the independent variables were consistent with the theoretical expectations in certain sub-periods and inconsistent in others. These inconsistencies could be due to the volatility of stock prices and other economic shocks that occurred within specific sub-periods. It could also be that the participants' perception of the impact of these variables is different from the theoretical expectations.; But over the span of the five sub-periods, some of the financial and macroeconomic variables proved to be good determinants of stock price behavior i.e., the real interest rate, the price-earnings ratio, the speculation index, the volume traded, change in the real money supply, and the real growth rate in earnings per share. Although there were instances where they deviated from the theoretical expectations, most times they were significant and consistent.; Generally, the models seemed to be able to track aggregate stock price behavior well within sub-periods characterized by economic stability, but most did not perform well during periods of high inflation, high uncertainties, and the 1987 stock market crash. Results of the models seem to show some promise when tested for the entire 1968-1988 period. This could be attributed to the length of the test period which allows the stock price indices to adjust to changes in both the financial and macroeconomic variables.; Of the three models tested, the FINMAC Model showed the most promising results. With the exception of 1978-1982 and 1987-1988, most of the coefficients in this model were significant and consistent with theoretical expectations.