The Aggregate Change in Shares and the Level of Stock Prices

46 Pages Posted: 21 Apr 1999

See all articles by William R. Nelson

William R. Nelson

Board of Governors of the Federal Reserve System

Date Written: January 25, 1999

Abstract

The average change in shares of equity is negatively correlated with estimates of the equity premium calculated using the dividend-ratio model of Campbell and Shiller, as well as with a variant of the model written in terms of the earnings-price ratio. This correlation is consistent with corporations issuing equity when it is a relatively inexpensive source of finance and repurchasing equity when it is a relatively good investment. However, when the retirement of shares resulting from mergers are included, the average change in shares is no longer significantly correlated with the equity premium.

JEL Classification: G14, G35

Suggested Citation

Nelson, William Richard, The Aggregate Change in Shares and the Level of Stock Prices (January 25, 1999). FEDS Paper No. 99-08. Available at SSRN: https://ssrn.com/abstract=158648 or http://dx.doi.org/10.2139/ssrn.158648

William Richard Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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