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Hard Times

46 Pages Posted: 20 Mar 2011 Last revised: 24 Dec 2011

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Christopher Polk

London School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: December 2011

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.

JEL Classification: G12, N22

Suggested Citation

Campbell, John Y. and Giglio, Stefano and Polk, Christopher, Hard Times (December 2011). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787000 or http://dx.doi.org/10.2139/ssrn.1787000

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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Stefano Giglio

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
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Christopher Polk

London School of Economics ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/polk/

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