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The recent ascent of stock prices: can it be explained by earnings growth or other fundamentals?

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Author Info

  • John B. Carlson
  • Kevin H. Sargent

Abstract

An analysis of the current relationship between stock prices, dividends, earnings, and returns, aimed at examining the causes of the recent stock market surge. It reveals that the markets level cannot be explained by any single fundamental element of standard stock valuation models, but rather manifests optimism about future dividend growth (based on the present record growth in earnings) and a lower expected return (reflecting a diminished risk premium for holding equity).

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File URL: http://www.clevelandfed.org/research/review/1997/97-q2-carlson.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Cleveland in its journal Economic Review.

Volume (Year): (1997)
Issue (Month): Q II ()
Pages: 2-12

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Handle: RePEc:fip:fedcer:y:1997:i:qii:p:2-12

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Keywords: Stock - Prices;

References

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  1. Robert B. Barsky & J. Bradford De Long, 1992. "Why Does the Stock Market Fluctuate?," NBER Working Papers 3995, National Bureau of Economic Research, Inc.
  2. Timothy Cogley, 1996. "Why do stock prices sometimes fall in response to good economic news?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec13.
  3. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
  4. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
  5. Greenwood, J. & Yorukoglu, M., 1996. "1974," RCER Working Papers 429, University of Rochester - Center for Economic Research (RCER).
  6. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
  7. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February.
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Citations

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Cited by:
  1. Laopodis, Nikiforos T., 2011. "Equity prices and macroeconomic fundamentals: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 247-276, April.
  2. Alberto Montagnoli & Oreste Napolitano, 2004. "Financial Condition Index and interest rate settings: a comparative analysis," Money Macro and Finance (MMF) Research Group Conference 2004 1, Money Macro and Finance Research Group.
  3. Henri Pag├Ęs, 1999. "A note on the Gordon growth model with nonstationary dividend growth," BIS Working Papers 75, Bank for International Settlements.
  4. Binswanger, Mathias, 2004. "Stock returns and real activity in the G-7 countries: did the relationship change during the 1980s?," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 237-252, May.
  5. Nathan S. Balke & Mark E. Wohar, 2001. "Explaining stock price movements: is there a case for fundamentals?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 22-34.
  6. Bohl, Martin T. & Siklos, Pierre L., 2004. "The present value model of U.S. stock prices redux: a new testing strategy and some evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 208-223, May.
  7. Dean Croushore, 1999. "How useful are forecasts of corporate profits?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-12.
  8. Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, vol. 53(1), pages 5-26.
  9. Laopodis, Nikiforos T., 2009. "Are fundamentals still relevant for European economies in the post-Euro period?," Economic Modelling, Elsevier, vol. 26(5), pages 835-850, September.

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