50 Pages Posted: 13 Sep 2012
Date Written: August 1, 2012
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 by using a VAR model of aggregate stock returns and valuations, estimated both without restrictions 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: Suggested Citation
Campbell, John Y. and Giglio, Stefano and Polk, Christopher, Hard Times (August 1, 2012). Chicago Booth Research Paper No. 12-46; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2145987 or http://dx.doi.org/10.2139/ssrn.2145987
By Andrew Ang