We show that comovements of individual stock prices cannot be justified by
economic fundamentals. This finding is a rejection of the present value model
of security valuation. Unlike other tests of this model, ours is robust in
that it allows for volatility in ex ante rates of return. The only constraint
we impose is that investors' utilities are functions of a single consumption
index. This implies that changes in discount rates must be related to changes
in macroeconomic variables, and hence stock prices of companies in unrelated
lines of business should move together only in response to changes in current
or expected future macroeconomic conditions. We also show that this constraint
implies that any priced factors in the APT model must be related to
macroeconomic variables. Hence our results are also a rejection of the APT, so
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