What drives stock prices? Fundamentals, bubbles and investor behaviour

Using a dynamic version of the present value model and a range of developed and Asian emerging markets, this article considers estimates of stock market prices given expectations on dividends and earnings and compares these fundamental stock prices with actual stock prices. The reported empirical results suggest that a dynamic present value model combined with differing definitions of cash flows can explain actual stock price movements for many of the sample markets. For markets where price deviations from fundamental value are statistically significant, the revealed deviations are investigated by considering types of investor behaviour which might drive such departures.