Working Paper: NBER ID: w1921
Authors: Robert S. Pindyck
Abstract: A simple model of equity pricing is developed to address two related questions. First, to what extent can unanticipated changes in such"fundamental" variables as profitability, real interest rates, inflation, and the variance of returns account for the observed behavior of the stockmarket? Second, how risk averse are investors in the aggregate?We find that the pretax profit rate and the variance of returns are both significant explanators of the market, and interest rates somewhat less so. Estimates of the index of relative risk aversion are obtained that put that parameter in the range of 3 to 4.
Keywords: Risk Aversion; Stock Market Behavior; Equity Pricing; Economic Variables
JEL Codes: G12; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in profitability (L21) | stock prices (G12) |
| decrease in variance of returns (G17) | stock prices (G12) |
| real interest rates (E43) | stock prices (G12) |
| inflation (E31) | stock prices (G12) |
| variance of returns (C29) | stock prices (G12) |