Hard Times

John Campbell, Stefano Giglio and Christopher Polk

Scholarly Articles from Harvard University Department of Economics

Abstract: We show that the stock market downturns of 2000–2002 and 2007–2009 have very different proximate causes. The early 2000s saw a large increase in the discount rates applied to profits by rational investors, while the late 2000s saw a decrease in rational expectations of future profits. We reach these conclusions by using a VAR model of aggregate stock returns and valuations, estimated both without restrictions and imposing the cross-sectional restrictions of the intertemporal capital asset pricing model (ICAPM). Our findings imply that the 2007–2009 downturn was particularly serious for rational long-term investors, whose losses were not offset by improving stock return forecasts as in the previous recession. (JEL G12, N22)

Date: 2013
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (15)

Published in Review of Asset Pricing Studies

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Journal Article: Hard Times (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:12172786

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