G:
Actually, and as most of your good points do, this brings
up a bigger issue to grapple with. Arguments could be made about what the 'correct' interest rate measure is... i.e., short term versus long term rates to compare to S&P. One cannot argue that it's irrelevant because short and long term rates move in proportional tandem since that's untrue sometimes. For now though, we must start somewhere and since you are doing all the work I'd say what you find easiest data to pull in can be starting point. Some other 'measures' are:
Fed Funds Rate (NY Fed)
Dealer Comm. Paper (90 Days) I think these are 'Repos'
LIBOR
From the Chicago Board of Trade
T-Bonds
T-Notes
5 yr treasury notes
I guess the main issues here are: Cost and Time. Theoretically if we are hypothesizing that the reason interest rates so closely match stock price movement is due to a firm's cost of capital moving, perhaps we should use something like the short term rate of money to tie to what a firm pays to borrow for short term, but usually recurring, operational cash needs.
Another argument could be made, though, that firms who may have begun a large project and are issuing longer term debt to fund, say, a large R&D project over next 5-10 years, should use a longer term interest rate measure. Then we would need to know how risky a firm's debt was rated relative to say a 5-10 year T-Bill's 'riskless' rate. In any event since the firm's debt will be T-bill rate plus some risk premium, assuming risk remains the same there should still be a fairly steady ratio in the comparison.
Let's start with what's available and cloud it up after that ;-) Thanks!
RO
Ps I'm sure there are academic papers on this subject already but I, like you, have an attraction to 'see for ourselves' by starting from scratch essentially. Then, all of us here can comment and thereby work through a lot of the issues we may have just ignored, or may have taken at a paper's authors' face value without critical thinking, otherwise. |
