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Financial Market Shocks and the Macroeconomy

Author

Listed:
  • Avanidhar Subrahmanyam
  • Sheridan Titman

Abstract

Feedback from stock prices to cash flows occurs because information revealed by firms' stock prices influences the actions of competitors. We explore the implications of feedback within a noisy rational expectations setting with incumbent publicly traded firms and privately held new entrants. In this setting the equilibrium relation among stock prices and both future dividends and aggregate output depends on the strategic environment in which these firms operate. In general, under reasonable conditions, the relations between prices, dividends, and economic output in our framework are consistent with empirical evidence in the macroliterature. We also generate new, potentially testable, implications. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Avanidhar Subrahmanyam & Sheridan Titman, 2013. "Financial Market Shocks and the Macroeconomy," The Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2687-2717.
    • Handle: RePEc:oup:rfinst:v:26:y:2013:i:11:p:2687-2717
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    File URL: http://hdl.handle.net/10.1093/rfs/hht058
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    Cited by:

    1. Wael Bousselmi & Patrick Sentis & Marc Willinger, 2018. "Impact of the Brexit vote announcement on long-run market performance," Working Papers hal-01954920, HAL.
    2. Bousselmi, Wael & Sentis, Patrick & Willinger, Marc, 2019. "How do markets react to (un)expected fundamental value shocks? An experimental analysis," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 90-113.
    3. Polyzos, Efstathios, 2022. "Examining the asymmetric impact of macroeconomic policy in the UAE: Evidence from quartile impulse responses and machine learning," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).
    4. Bharat Kumar Meher & Iqbal Thonse Hawaldar & Santosh Kumar & Abhishek Kumar Gupta, 2022. "Modelling Market Indices, Commodity Market Prices and Stock Prices of Energy Sector using VAR with Variance Decomposition Model," International Journal of Energy Economics and Policy, Econjournals, vol. 12(4), pages 122-130, July.
    5. Li, Zhouxin & Wang, Zhiguang & Diersen, Matthew, 2024. "Do Agricultural Commodity Price Spikes Always Stem from News?," 2024 Conference, April 22-23, 2024, St. Louis, Missouri 379009, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    6. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    7. Liyan Yang & Itay Goldstein, 2014. "Market Efficiency and Real Efficiency: The Connect and Disconnect via Feedback Effects," 2014 Meeting Papers 154, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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