NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Market Shocks and the Macroeconomy

Avanidhar Subrahmanyam, Sheridan Titman

NBER Working Paper No. 19383
Issued in August 2013
NBER Program(s):   AP   CF

Feedback from stock prices to cash flows occurs because information revealed by firms' stock prices influences the actions of competitors. We explore the implications of feedback within a noisy rational expectations setting with incumbent publicly traded firms and privately held new entrants. In this setting the equilibrium relation among stock prices and both future dividends and aggregate output depends on the strategic environment in which these firms operate. In general, under reasonable conditions, the relations between prices, dividends, and economic output in our framework are consistent with empirical evidence in the macroliterature. We also generate new, potentially testable, implications.

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Document Object Identifier (DOI): 10.3386/w19383

Published: Avanidhar Subrahmanyam & Sheridan Titman, 2013. "Financial Market Shocks and the Macroeconomy," Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2687-2717. citation courtesy of

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