Why Does the Stock Market Fluctuate?

Robert Barsky and J. Bradford De Long

The Quarterly Journal of Economics, 1993, vol. 108, issue 2, 291-311

Abstract: Major long-run swings in the U. S. stock market over the past century are broadly consistent with a model driven by changes in current and expected future dividends in which investors must estimate the time-varying long-run dividend growth rate. Such an estimated long-run growth rate resembles a long distributed lag on past dividend growth, and is highly correlated with the level of dividends. Prices therefore respond more than proportionately to long-run movements in dividends. The time-varying component of dividend growth need not be detectable in the dividend data for it to have large effects on stock prices.

Date: 1993
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