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Hard times

Campbell, John Y. and Giglio, Stefano and Polk, Christopher (2011) Hard times. AFA 2012 Chicago Meetings Paper, SSRN.

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Abstract

We show that the stock market downturns of 2000-2002 and 2007-2009 have very different proximate causes. The early 2000’s saw a large increase in the discount rates applied to profits by rational investors, while the late 2000’s saw a decrease in rational expectations of future profits. We reach these conclusions using a VAR model of aggregate stock returns and valuations, estimated both freely and imposing the cross-sectional restrictions of the 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.

Item Type: Monograph (Working Paper)
Official URL: http://papers.ssrn.com/sol3/JELJOUR_Results.cfm?fo...
Additional Information: © 2011 The authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 16 Apr 2012 11:09
Last Modified: 24 Jan 2013 15:55
URI: http://eprints.lse.ac.uk/id/eprint/43097

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