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A post-Keynesian theory for the yield on equity markets

Listed author(s):
  • Javier Lopez Bernardo

    ()

    (Kingston University)

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    This paper offers a novel post-Keynesian theory, in a stock-flow consistent framework, to understand equity returns and their links with economic growth and consumption decisions from a long-run perspective. The main features of such a theory can be summarised as follows. First, there is a negative relationship between Tobin’s q and economic growth. Second, the effect of economic growth on dividend yields and earnings growth is positive, but its effect on the growth in the number of shares is negative (i.e. a ‘dilution effect’), which makes the relationship between equity returns and economic growth undetermined a priori. Third, consumption decisions emerge as crucial drivers for shareholder profitability in the long-run, being such a result very close to Kalecki’s theory of profits, but now applied to financial markets. And fourth, in the post-Keynesian theory the equity yield is determined by aggregate demand, and no theory of risk is needed. Finally, the post-Keynesian theory will be compared against the mainstream financial theory, which features the famous risk-return nexus where asset returns are given by the volatility of the asset with respect to consumption. It will be claimed that the use of risk for determining equity returns at the macroeconomic level is problematic, and that depending on the risk definition assumed, the risk-return relationship can be either positive or negative – being thus such a nexus of little theoretical significance and posing serious problems for mainstream finance.

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    File URL: http://www.postkeynesian.net/downloads/working-papers/PKWP1613_AYqodXn.pdf
    File Function: First version, 2016
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    Paper provided by Post Keynesian Economics Study Group (PKSG) in its series Working Papers with number PKWP1613.

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    Length: 26
    Date of creation: Jul 2016
    Handle: RePEc:pke:wpaper:pkwp1613
    Contact details of provider: Web page: http://www.postkeynesian.net

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