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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.

Suggested Citation

  • Michele Boldrin & Adrian Peralta-Alva, 2009. "What happened to the U.S. stock market? accounting for the past 50 years," Review, Federal Reserve Bank of St. Louis, vol. 91(Nov), pages 627-646.
  • Handle: RePEc:fip:fedlrv:y:2009:i:nov:p:627-646:n:v.91no.6
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    Cited by:

    1. Sami Alpanda & Adrian Peralta-Alva, 2010. "Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 824-842, October.
    2. Dongya Koh & Raül Santaeulàlia‐Llopis & Yu Zheng, 2020. "Labor Share Decline and Intellectual Property Products Capital," Econometrica, Econometric Society, vol. 88(6), pages 2609-2628, November.
    3. Jean-Pierre Danthine & John B. Donaldson & Paolo Siconolfi, 2005. "Distribution Risk and Equity Returns," Cahiers de Recherches Economiques du Département d'économie 05.10, Université de Lausanne, Faculté des HEC, Département d’économie.
    4. Iraola, Miguel A. & Santos, Manuel S., 2017. "Asset price volatility, price markups, and macroeconomic fluctuations," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 84-98.
    5. Miguel Angel Iraola & Manuel S. Santos, 2009. "Long-Term Asset Price Volatility and Macroeconomics Fluctations," Working Papers 0909, Centro de Investigacion Economica, ITAM.
    6. 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 2009-13, University of Massachusetts Amherst, Department of Economics.
    7. Adrian Peralta-Alva, 2007. "THE INFORMATION TECHNOLOGY REVOLUTION AND THE PUZZLING TRENDS IN TOBIN'S AVERAGE "q"," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 929-951, August.
    8. Yu Zheng & Raul Santaeulalia & Dongya Koh, 2015. "Labor Share Decline and the Capitalization of Intellectual Property Products," 2015 Meeting Papers 844, Society for Economic Dynamics.
    9. Luigi Bocola & Nils M. Gornemann, 2013. "Risk, economic growth and the value of U.S. corporations," Working Papers 13-10, Federal Reserve Bank of Philadelphia.
    10. Sangmin Aum & Dongya Koh & Raül Santaeulàlia-Llopis, 2019. "Increasing and Decreasing Labor Shares: Cross-Country Differences in the XXI Century," Working Papers 1135, Barcelona School of Economics.

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    Asset pricing; Stock market;

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