John Y. Campbell
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Stefano W. Giglio
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
London School of Economics
AFA 2012 Chicago Meetings Paper
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.
Number of Pages in PDF File: 46
JEL Classification: G12, N22
Date posted: March 20, 2011 ; Last revised: December 24, 2011
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