Working Paper: NBER ID: w19818
Authors: Daniel L. Greenwald; Martin Lettau; Sydney C. 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: stock market; economic shocks; risk aversion; factors share shock
JEL Codes: G0; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption shock (E21) | TFP shock (F16) |
| labor income shock (J39) | factors share shock (D33) |
| wealth shock (G59) | risk aversion shock (D81) |
| risk aversion shock (D81) | stock market fluctuations (G10) |
| factors share shock (D33) | stock market fluctuations (G10) |
| TFP shock (F16) | stock market wealth (G19) |
| factors share shock (D33) | real stock market wealth (G19) |