Hard Times

50 Pages Posted: 13 Sep 2012  

John Y. Campbell

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

Stefano Giglio

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Christopher Polk

London School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2012

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 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

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

John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stefano Giglio (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher Polk

London School of Economics ( email )

United Kingdom

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

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