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Hard Times

John Campbell (), Stefano Giglio and Christopher Polk

Review of Asset Pricing Studies, 2013, vol. 3, issue 1, 95-132

Abstract: We show that the stock market downturns of 2000–2002 and 2007–2009 have very different proximate causes. The early 2000s saw a large increase in the discount rates applied to profits by rational investors, while the late 2000s saw a decrease in rational expectations of future profits. We reach these conclusions by using a VAR model of aggregate stock returns and valuations, estimated both without restrictions and imposing the cross-sectional restrictions of the intertemporal capital asset pricing model (ICAPM). Our findings imply that the 2007–2009 downturn was particularly serious for rational long-term investors, whose losses were not offset by improving stock return forecasts as in the previous recession.

JEL-codes: G12 N22 (search for similar items in EconPapers)
Date: 2013
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