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Title: Origins of Stock Market Fluctuations

Author(s): Daniel L. Greenwald, Martin Lettau and Sydney C. Ludvigson

Publication Date: January 2015

Keyword(s): labor income, stock market wealth and stock prices

Programme Area(s): Financial Economics and International Macroeconomics

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.

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Bibliographic Reference

Greenwald, D, Lettau, M and Ludvigson, S. 2015. 'Origins of Stock Market Fluctuations'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10336