Working Paper: NBER ID: w25769
Authors: Daniel L. Greenwald; Martin Lettau; Sydney C. Ludvigson
Abstract: Why does the stock market rise and fall? From 1989 to 2017, the real per-capita value of corporate equity increased at a 7.2% annual rate. We estimate that 40% of this increase was attributable to a reallocation of rewards to shareholders in a decelerating economy, primarily at the expense of labor compensation. Economic growth accounted for just 25% of the increase, followed by a lower risk price (21%), and lower interest rates (14%). The period 1952 to 1988 experienced only one third as much growth in market equity, but economic growth accounted for more than 100% of it.
Keywords: stock market; factor shares; market fundamentals
JEL Codes: G00; G12; G17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| averaging return data (C81) | overstated true unconditional risk premium (G19) |
| factor shares (D33) | market equity (G10) |
| reallocation of rewards from labor to capital (D33) | market equity (G10) |
| economic growth (O49) | market equity (G10) |
| risk-free interest rates (E43) | market equity (G10) |
| risk premiums (G19) | market equity (G10) |