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Financial Market Shocks and the Macroeconomy

  • Avanidhar Subrahmanyam
  • Sheridan Titman

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19383.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19383
Note: AP CF
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