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Learning from Stock Prices and Economic Growth

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  • Joel Peress

Abstract

A competitive stock market is embedded into a neoclassical growth economy to analyze the interplay between the acquisition of information about firms, its partial revelation through stock prices, capital allocation, and income. The stock market allows investors to share their costly private signals in a cost-effective incentive-compatible way. It contributes to economic growth by raising total factor productivity (TFP). A calibration indicates the effect on TFP to be large but that on income to be modest. Several predictions on the evolution of real and financial variables are derived. Finally, the growth impact of two common forms of investor irrationality, overconfidence and inattention, are analyzed.

Suggested Citation

  • Joel Peress, 2014. "Learning from Stock Prices and Economic Growth," The Review of Financial Studies, Society for Financial Studies, vol. 27(10), pages 2998-3059.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:10:p:2998-3059.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu021
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    Cited by:

    1. Peress, Joel & Schmidt, Daniel, 2021. "Noise traders incarnate: Describing a realistic noise trading process," Journal of Financial Markets, Elsevier, vol. 54(C).
    2. Rahi, Rohit & Zigrand, Jean-Pierre, 2018. "Information acquisition, price informativeness, and welfare," Journal of Economic Theory, Elsevier, vol. 177(C), pages 558-593.
    3. Aviral K. Tiwari & Claudiu T. Albulescu & Rangan Gupta, 2016. "Time-frequency relationship between US output with commodity and asset prices," Applied Economics, Taylor & Francis Journals, vol. 48(3), pages 227-242, January.
    4. Rahi, Rohit & Zigrand, Jean-Pierre, 2018. "Information acquisition, price informativeness and welfare," LSE Research Online Documents on Economics 118935, London School of Economics and Political Science, LSE Library.
    5. Dierkes, Maik & Germer, Stephan & Sejdiu, Vulnet, 2020. "Probability distortion, asset prices, and economic growth," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    6. Yang, Fan, 2019. "The impact of financial development on economic growth in middle-income countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 74-89.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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