Working Paper: CEPR ID: DP10336
Authors: Daniel L. Greenwald; Martin Lettau; Sydney Ludvigson
Abstract: Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.
Keywords: Labor income; Stock market wealth; Stock prices
JEL Codes: G10; G12; G17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| three mutually uncorrelated economic disturbances (E39) | 85% of the quarterly variation in real stock market wealth (G19) |
| shocks affecting risk aversion (D81) | 75% of the variation in the log difference of stock market wealth (D31) |
| factors share shock (D33) | roughly 40% over longer cycles (two to three decades) (E32) |
| cumulative effects of the factors share shock (F62) | significant increase in real stock market wealth since 1980 (P17) |
| risk aversion shocks (D81) | contribute an additional 38% to the increase in real stock market wealth since 1980 (F62) |