Modelling and Simulation Society of Australia and New Zealand
Faculty of Business and Public Management
School of Finance and Business Economics
This article examines the deviation of the UK market index from market fundamentals implied by the simple dividend discount model and identifies other components that also affect price movements. The components are classified as permanent, temporary, excess stock returns and non-fundamental innovations in terms of a multivariate moving average model [Lee 1998]. We find that time varying discounted rates play an active role in explaining price deviations.