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Why Are Stock Market Returns Correlated with Future Economic Activity?

Version
v1
Resource Type
Dataset : survey data
Creator
  • Guo, Hui (Federal Reserve Bank of St. Louis)
Other Title
  • Version 1 (Subtitle)
Publication Date
2002-08-13
Language
English
Free Keywords
economic activity; investment returns; stock prices; stock market returns
Description
  • Abstract

    Stock price, because it is a forward-looking variable, forecasts economic activities. An unexpected increase in stock price reflects that (1) future dividend growth is higher and/or (2) future discount rates are lower than previously anticipated. Therefore, the increase predicts higher output and investment. As well, other studies argue for an important relation between the expected stock market return and investment. In this paper, the author analyses the relative importance of these mechanisms by using Campbell and Shiller's (1988) method to decompose stock market return into three parts: expected return, a shock to the expected future return, and a shock to the expected future dividend growth. Contrary to the conventional wisdom, the author finds that dividend shocks are a rather weak predictor for future economic activities. Moreover, the expected return and shocks to the expected future return display different predictive patterns. The results shown here, collectively, explain why the forecasting power of stock market return is rather limited.
  • Table of Contents

    Datasets:

    • DS1: Dataset
Collection Mode
  • The files submitted are a data file, 0203hgd.xls, and a program file, 0203hgp.tsp. These data are part of ICPSR's Publication-Related Archive and are distributed exactly as they arrived from the data depositor. ICPSR has not checked or processed this material. Users should consult the investigator(s) if further information is desired.

Availability
Download
This study is freely available to the general public via web download.
Alternative Identifiers
  • 1261 (Type: ICPSR Study Number)

Update Metadata: 2015-08-05 | Issue Number: 6 | Registration Date: 2015-06-15

Guo, Hui (2002): Why Are Stock Market Returns Correlated with Future Economic Activity?. Version 1. Version: v1. ICPSR - Interuniversity Consortium for Political and Social Research. Dataset. https://doi.org/10.3886/ICPSR01261.v1