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What happened to the US stock market? Accounting for the last 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 understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, however, this measure fails to account for stock market movements as well. We thus abandon the perfect foresight assumption. Assuming instead that forecasts of future capital income are performed using a distributed lag equation and information available up to the forecasting period only, we find that standard asset pricing theory can be reconciled with the secular trends in the stock market. Nevertheless, our study 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 US stock market? Accounting for the last 50 years," Working Papers 2009-042, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2009-042
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    1. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
    2. Campbell, John Y., 2003. "Consumption-based asset pricing," 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 13, pages 803-887, Elsevier.
    3. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.
    4. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    5. Robert B. Barsky & J. Bradford De Long, 1993. "Why Does the Stock Market Fluctuate?," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 291-311.
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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. 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.
    6. 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.
    7. Luigi Bocola & Nils Gornemann, 2013. "Risk, economic growth and the value of U.S. corporations," Working Papers 13-10, Federal Reserve Bank of Philadelphia.

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    Keywords

    Stock market; Asset pricing;

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