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Origins of Stock Market Fluctuations

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  • Lettau, Martin
  • Ludvigson, Sydney
  • Greenwald, Dan

Abstract

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.

Suggested Citation

  • Lettau, Martin & Ludvigson, Sydney & Greenwald, Dan, 2015. "Origins of Stock Market Fluctuations," CEPR Discussion Papers 10336, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10336
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    More about this item

    Keywords

    Labor income; Stock market wealth; Stock prices;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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