MIT Sloan School of Management
100 Main Street, E62-641
Cambridge, MA 02142
NBER Working Papers and Publications
|January 2014||Origins of Stock Market Fluctuations|
with Martin Lettau, Sydney C. Ludvigson: w19818
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.