Abstract:
In this paper, we examine the effects of money supply, portfolio, aggregate spending, and
aggregate supply shocks on real US stock prices in a structural vector autoregression
framework using quarterly data for the period of 1947:1-2011:3. Overall, the empirical
results indicate that each macro shock has important effects on real stock prices, with
aggregate supply shocks playing an important role, besides portfolio shocks. The real
stock price impulse responses to the various macro shocks conform to the standard
present-value equity valuation model, and hence, our identification based on long-run
restrictions can be viewed as appropriate. An historical decomposition indicates that the
decline in the real stock prices during the “Great Recession” is mainly due to a slowdown
in US productivity, after investors had decided to carry out exogenous portfolio shifts out
of stocks. In general, we conclude that during the “Great Recession” the declining stock
prices resulted due to a series of unfavourable shocks emanating from different sectors of
the US economy.
