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How Did It Happen?

  • Brennan, Michael J

Between January 1980 and August 2000 American stock prices as measured by the S&P500 index rose by 1239%; over the same period the dividends on the shares underlying the index rose by only 188%, while the earnings rose by 254%. Between August 2000 and February 2003 the price index fell by 44% and, at the time of writing, some three and a half years later, the index is still some 25% below its August 2000 level, despite the fact that long term interest rates have fallen by around 100 basis points, and the fall is much greater if measured in terms of foreign currency such as the Euro. As Figure 1 shows, American stock price behavior at the turn of the millennium had all the characteristics of a classic bubble;2 prices climbed much faster than dividends or earnings, particularly starting from the beginning of 1995. What caused this?

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt1047x6kv.

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Date of creation: 01 Feb 2004
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Handle: RePEc:cdl:anderf:qt1047x6kv
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  1. John H. Cochrane, 1997. "Where is the market going? Uncertain facts and novel theories," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 3-37.
  2. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 36-58.
  3. James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
  4. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
  5. Louis K. C. Chan & Jason Karceski & Josef Lakonishok, 2003. "The Level and Persistence of Growth Rates," Journal of Finance, American Finance Association, vol. 58(2), pages 643-684, 04.
  6. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
  7. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
  8. Krigman, Laurie & Shaw, Wayne H. & Womack, Kent L., 2001. "Why do firms switch underwriters?," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 245-284, May.
  9. Eugene Fama & F. & Kenneth R. French, . "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier.
  11. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-37, October.
  12. Brennan, Michael J. & Xia, Yihong, 2004. "International Capital Markets and Foreign Exchange Risk," University of California at Los Angeles, Anderson Graduate School of Management qt53z0s29k, Anderson Graduate School of Management, UCLA.
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