The Big Bang: Stock Market Capitalization in the Long Run
Dmitry Kuvshinov () and
Kaspar Zimmermann ()
Additional contact information
Dmitry Kuvshinov: Department of Economics, University of Bonn
Kaspar Zimmermann: Department of Economics, University of Bonn
No 136, Working Papers from European Historical Economics Society (EHES)
This paper presents annual stock market capitalization data for 17 advanced economies from 1870 to today. Extending our knowledge beyond individual benchmark years in the seminal work of Rajan and Zingales (2003) reveals a striking new time series pattern: over the long run, the evolution of stock market size resembles a hockey stick. The stock market cap to GDP ratio was stable for more than a century, then tripled in the 1980s and 1990s and remains high to this day. This trend is common across countries and mirrors increases in other ﬁnancial and price indicators, but happens at a much faster pace. We term this sudden structural shift “the big bang” and use novel data on equity returns, prices and cashﬂows to explore its underlying drivers. Our ﬁrst key ﬁnding is that the big bang is driven almost entirely by rising equity prices, rather than quantities. Net equity issuance is sizeable but relatively constant over time, and plays very little role in the short, medium and long run swings in stock market cap. Second, much of this price increase cannot be explained by more favourable fundamentals such as proﬁts and taxes. Rather, it is driven by lower equity risk premia – a factor that is linked to subjective beliefs and can be quite ﬁckle, and easily reversible. Third, consistent with this risk premium view of stock market size, the market cap to GDP ratio is a reliable indicator of booms and busts in the equity market. High stock market capitalization – the “Buffet indicator” – forecasts low subsequent equity returns, and low – rather than high – cashﬂow growth, outperforming standard predictors such as the dividend-price ratio.
Keywords: Stock market capitalization; ﬁnancial development; ﬁnancial wealth; equity issuance; equity valuations; risk premiums; equity bubbles. (search for similar items in EconPapers)
JEL-codes: E44 G10 G20 N10 N20 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hes:wpaper:0136
Access Statistics for this paper
More papers in Working Papers from European Historical Economics Society (EHES) Contact information at EDIRC.
Bibliographic data for series maintained by Paul Sharp ().