Why Does the Stock Market Fluctuate?Large long-run swings in the United States stock market over the past century correspond to swings in estimates of fundamental values calculated by using a long moving average of past dividend growth to forecast future growth rates. Such a procedure would have been reasonable if investors were uncertain of the structure of the economy. and had to make forecasts of unknown and possibly-changing long-run dividend growth rates. The parameters of the stochastic process followed by dividends over the twentieth century cannot be precisely estimated even today at the century's end. Investors in the past had even less information about the dividend process. In such a context, it is difficult to see how investors can be faulted for implicitly forecasting future dividends by extrapolating past dividend growth. |
Common terms and phrases
Author Title average of past Barsky Bradford DE LONG Brownian motion changes in log Christian DUSTMANN correlated dividend growth rate dividend process economists equation EUI Working Paper European University Institute excess volatility extrapolating past dividend Fabio CANOVA future dividend growth growth rate gt growth rate shocks HAMMOND impulse response investors form John MICKLEWRIGHT Kleidon level of dividends log dividends Log of Real long moving average long swings Louis PHLIPS mean reverting component Oligopoly parameters past century past dividend changes past dividend growth percent perfect-foresight fundamental permanent dividend growth permanent growth rate permanent shocks Peter Point Geometry precisely estimated present value Price-Dividend Ratio prices and dividends print ECO random walk rate of dividends rational rational expectations real dividends Real Stock Index regression reprint of Shiller Stephen MARTIN stock index prices stock market index swings in dividends swings in stock twenty-year changes Unemployment unit root variance of twenty-year WALDMANN year-to-year