What happened to the US stock market? Accounting for the last 50 years

Michele Boldrin and Adrian Peralta-Alva ()

No 2009-042, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that, in the long run, the market reverts to well understood fundamentals. Our work suggests this belief should be questioned as well. First, we show actual dividends cannot account for the secular trends of stock market values. We then consider a more comprehensive measure of capital income. This measure displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, however, this measure fails to account for stock market movements as well. We thus abandon the perfect foresight assumption. Assuming instead that forecasts of future capital income are performed using a distributed lag equation and information available up to the forecasting period only, we find that standard asset pricing theory can be reconciled with the secular trends in the stock market. Nevertheless, our study leaves open an important puzzle for asset pricing theory: the market value of U.S. corporations was much lower than the replacement cost of corporate tangible assets from the mid 1970s to the mid 1980s.

Keywords: Stock market; Asset pricing (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://research.stlouisfed.org/wp/2009/2009-042.pdf (application/pdf)

Related works:
Journal Article: What happened to the U.S. stock market? accounting for the past 50 years (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2009-042

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().