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Stock Market Valuation and Monopolistic Competition: a Dynamic Stochastic General Equilibrium Approach

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  • Gabriel Talmain
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    Abstract

    This paper extends a Real Business Cycle model to an economy in which monopolistic competitive firms’ technology is subject to idiosyncratic and common shocks. The value of future technology rents drive stock market valuation. We study how the arrival of new information about future technological developments affect each firm’s stream of future profit, the rate on return on physical capital, and the value of equity. We show that good news about future technology of a specific firm or industry will lift the price of shares of the specific firms, but that good news about future aggregate productivity will raise the discount rate, leaving the price of shares unchanged. On the other hand, good news about future aggregate profit margins will lift the price of shares.

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    File URL: http://www.gla.ac.uk/media/media_26604_en.pdf
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    Bibliographic Info

    Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2007_10.

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    Date of creation: Jun 2007
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    Handle: RePEc:gla:glaewp:2007_10

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    Related research

    Keywords: Equity; Heterogeneous (non-representative) firms; Monopolistic Competition; Real Business Cycle (RBC); Stock Market;

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