The Role of Stock Prices in Business Cycles

25 Pages Posted: 8 Feb 2007

See all articles by James Ross McCown

James Ross McCown

University of Oklahoma - Division of Finance; Toltec Group

Date Written: February 4, 2007

Abstract

Stock prices slowly adjust after the peak of a business cycle. High stock prices during the months following the peak result in a lower cost of capital for firms. Investment is much higher than it would be otherwise. We estimate a dynamic macroeconomic model in four variables: investment, stock prices, GDP, and interest rates. Stock prices are shown to be exogenous to the system, and investment is positively related to the stock prices. Investment and GDP would be significantly lower during the recessions since 1969 if stock prices adjusted immediately. High stock prices cushion the blow of the recession.

Keywords: business cycle, yield curve

JEL Classification: E32, E43

Suggested Citation

McCown, James Ross, The Role of Stock Prices in Business Cycles (February 4, 2007). Available at SSRN: https://ssrn.com/abstract=961872 or http://dx.doi.org/10.2139/ssrn.961872

James Ross McCown (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

Toltec Group ( email )

Oklahoma City, OK
United States