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

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  • Gabriel Talmain

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.

Suggested Citation

  • Gabriel Talmain, 2007. "Stock Market Valuation and Monopolistic Competition: a Dynamic Stochastic General Equilibrium Approach," Working Papers 2007_10, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2007_10
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    File URL: http://www.gla.ac.uk/media/media_26604_en.pdf
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    Cited by:

    1. Karim M. Abadir & Gabriel Talmain, 2008. "Macro and Financial Markets: The Memory of an Elephant?," Working Paper series 17_08, Rimini Centre for Economic Analysis.
    2. Karim M. Abadir, 2013. "Lies, Damned Lies, and Statistics? Examples From Finance and Economics," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 5(4), pages 231-248, December.
    3. Karim M. Abadir & Gabriel Talmain, 2012. "Beyond Co-Integration: Modelling Co-Movements in Macro finance," Working Paper series 25_12, Rimini Centre for Economic Analysis.

    More about this item

    Keywords

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

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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