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• W1488332136 abstract "This study puts forward a new methodology for constructing indicators of asset price misalignments based on macroeconomic fundamentals. The basic hypothesis is that asset prices have a long run relation with macroeconomic fundamentals, namely with economic activity and interest rates. Generally, asset prices close to the levels implied by such long-run relation may be considered to be “fair” or normal levels. Large deviations from the levels implied by the fundamentals could be a sign of over or under valuation. In the literature, several benchmarks for assessing asset price valuations have been proposed. Such indicators are useful as it is generally thought that it is undesirable that asset prices deviate too much from the levels implied by fundamentals. In particular, the development of speculative bubbles in asset prices that may later burst is a concern from the point of view of macroeconomic and financial stability. Thus, while recognising that it is difficult to determine the fundamental or “normal” value of an asset, there is a need for such benchmark indicators. This is reflected in the number of reference indicators that are commonly used with this aim, such as historical patterns of price-earnings, dividend yields, methods based on discounted cash flows, etc. (for a recent overview of this literature see Gurkaynak, 2005). In a recent study of 18 OECD countries, Detken and Smets (2004) use a methodology based on deviations from a long-run trend for detecting periods of over or undervaluation in asset prices. More precisely, periods of overvaluation correspond to periods where a real composite index of asset prices (including house prices and equity prices) is continuously more than 10% above its long-run trend, which represents its fundamental value (1) . Implicit in this definition of periods of overvaluation is the notion of the quantiles of the conditional distribution of the asset prices. In fact, implicit in such definition is an assessment of the likelihood of such occurrences. Periods of excessive valuation should correspond to extreme cases. In the method of Detken and Smets implies a price level 10% or more above the trend. However, this assessment is not quantified in probabilistic terms. This article presents the results of a new methodology for detecting asset price misalignments using non-parametric quantile regressions which can complement other methods, such as the one of Detken and Smets. With our approach the whole conditional distribution of asset prices is estimated which makes it possible to assess with higher precision whether the periods identified by other methods correspond to situations of excessive valuation or not. With the estimates of the quantile approach it is also possible to analyse the evolution of dispersion and asymmetry of the distribution of share prices over time. One advantage of the method is that macroeconomic fundamentals can be taken into account in the analysis. The quantile approach can also be useful for computing Value at Risk (VaR) measures of assets as a function of macroeconomic variables, finan" @default.
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• W1488332136 date "2005-01-01" @default.
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• W1488332136 title "ASSET PRICES AND MACROECONOMIC FUNDAMENTALS IN THE EURO AREA" @default.
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