DP10336 Origins of Stock Market Fluctuations

Author(s): Daniel L. Greenwald, Martin Lettau, Sydney C. Ludvigson
Publication Date: January 2015
Keyword(s): labor income, stock market wealth, stock prices
JEL(s): G10, G12, G17
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10336

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.