Flav

The Twenty Year Stock Bubble Is Still Inflated

But testing wether the coefficient is somewhat constant, which means a constant mean, is precisely what a Dickey Fuller test wants to verify. The test would be like this: (MC/GDP)t = a*(MC/GDP)t-1 + et et~N(0,sigma2)

Ho: a = 1
H1: a < 1

Of course, the test should be made using difference expressions, but the nature is the same. If it happens to be stationary, then i would agree that you can compute a historical average, but i'm really skeptic about the series being stationary


On Nov 20 09:38 AM BSD77 wrote:

> Well, if for example the two variables (GDP and MC) are perfectly
> correlated, than the ratio doesn't change at all. E.g. if MC=5 at
> t=0 , GDP=10, growth rate = 5% and corr.coef.=1 --> ratio=2 constantly.
> Of course the assumption of correlation of 1 in this case is not
> realistic but I think I can see the author's point that strong correlation
> between the two should hold in long term (or should in the perfectly
> efficient market environment).

The Twenty Year Stock Bubble Is Still Inflated

But market capitalization and GDP are both non-stationary series, so, why would you expect a variable constructed as a ratio of this two to be stationary? I believe the Dickey-Fuller test is still suitable for this situation, as you define the new variable as MC/GDP. Of course, the correlation between the variables makes things a little messy, but i think is the proof is still valid

The Twenty Year Stock Bubble Is Still Inflated

But market capitalization and GDP are both non-stationary series, so, why would you expect a variable constructed as a ratio of this two to be stationary? I believe the Dickey-Fuller test is still suitable for this situation, as you define the new variable as MC/GDP


On Nov 20 08:14 AM BSD77 wrote:

> I see that sbd. was sitting for the Level 2 exam ;-) but still I'm
> not sure that Dickey Fuller test is relevant here - it is a test
> for non-stationarity of data that's for sure but it would be more
> appropriate for a time series of one dependent variable in time,
> not a ratio, since both of the variables here are (or should be)
> strongly correlated and hence there ratio should be constant over
> time.

The Twenty Year Stock Bubble Is Still Inflated

So, have you test the stationarity of the series in order to claim that a historical average has any meaning? In case you're unaware of, i remind you that when a time series is not stationary, then both its mean and its variance depend and hence change with time, so to compute a historical mean is absolutely worhtless, as i think it is the case here.
Please, before making any statement regarding a financial time series, at least try to make a Dickey-Fuller test

What If What Economists Taught Us Is Wrong?

New Keynessian economics does not state that money and credit have no influence on the economy but just the opposite. Ben Bernanke belongs to that school, and he developed several models that emphasize the main role of credit in economic growth. Bernanke and Blinder developed a model in which they show how bank lending affects the real economy. The person who wrote this article, or the man which is quoted (i believe his name is Munchau) suffers from a severe grade of a decease called ignorance