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What happened to the U.S. stock market? accounting for the past 50 years

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  • Michele Boldrin
  • Adrian Peralta-Alva

Abstract

The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that in the long run the market reverts to well-established fundamentals. The authors' research suggests this belief should be questioned. First, they show actual dividends cannot account for the secular trends of stock market values. They then consider a more comprehensive measure of capital income, which displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, however, this measure fails to properly account for stock market movements. The authors thus abandon the perfect foresight assumption and instead assume that forecasts of future capital income are performed using a distributed lag equation and information available up to the forecasting period only. They find that standard asset-pricing theory can be reconciled with the secular trends in the stock market. This study, nevertheless, leaves open an important puzzle for asset-pricing theory: The market value of U.S. corporations was much lower than the replacement cost of corporate tangible assets from the mid-1970s to the mid-1980s.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2009)
Issue (Month): Nov ()
Pages: 627-646

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Handle: RePEc:fip:fedlrv:y:2009:i:nov:p:627-646:n:v.91no.6

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Keywords: Stock market ; Asset pricing;

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References

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  1. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report, Federal Reserve Bank of Minneapolis 280, Federal Reserve Bank of Minneapolis.
  2. Robert B. Barsky & J. Bradford De Long, 1992. "Why Does the Stock Market Fluctuate?," NBER Working Papers 3995, National Bureau of Economic Research, Inc.
  3. Bart Hobijn & Boyan Jovanovic, 2000. "The Information Technology Revolution and the Stock Market: Evidence," NBER Working Papers 7684, National Bureau of Economic Research, Inc.
  4. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, American Economic Association, vol. 74(4), pages 650-59, September.
  5. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier.
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Cited by:
  1. Alpanda, Sami & Peralta-Alva, Adrian, 2007. "Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74," MPRA Paper 5896, University Library of Munich, Germany.
  2. Adrian Peralta-Alva, 2005. "The Information Technology Revolution and the Puzzling Trends in Tobin’s average q," Macroeconomics, EconWPA 0511007, EconWPA.
  3. Jean-Pierre Danthine & John B. Donaldson & Paolo Siconolfi, 2005. "Distribution Risk and Equity Returns," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 05.10, Université de Lausanne, Faculté des HEC, DEEP.
  4. James Crotty, 2009. "The Bonus-Driven “Rainmaker” Financial Firm: How These Firms Enrich Top Employees, Destroy Shareholder Value and Create Systemic Financial Instability," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2009-13, University of Massachusetts Amherst, Department of Economics.

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