Q: Risk, Rents, or Growth?
67 Pages Posted: 26 Mar 2020 Last revised: 29 Apr 2020
Date Written: March 1, 2020
The dramatic stock market crash of March 2020 was preceded by a prolonged rise in Tobin's Q and a productivity slowdown. Do longer stock market booms and sharper corrections reflect structural changes in the US economy? We address this question about Q by estimating an endogenous growth model featuring realistic risk premia and markups. Our baseline estimates highlight the importance of rising market power for explaining increasing valuation ratios despite declining growth prospects with weakening investment and innovation over the past decade. High industry concentration exacerbates economic downturns and stock market corrections triggered by adverse economic shocks. We provide novel forecasts about growth expectations based on current market valuations using our structural model.
Keywords: Tobin's Q, Aggregate demand, Simulated method of moments, Corporate investment, Intangible capital, Innovation, Industry concentration, Price-dividend ratios, Asset valuations, Equity premium
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