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Origins of Stock Market Fluctuations

date Date: December 16, 2014
date Author(s): Daniel L. Greenwald, Martin Lettau, Sydney C. Ludvigson
date Affiliation: New York University - UC Berkeley
Abstract

Three mutually uncorrelated economic disturbances that we measure empirically
explain 85% of the quarterly variation in real stock market wealth since 1952. A
model is employed to interpret these disturbances in terms of three latent primitive
shocks. In the short run, shocks that a§ect the willingness to bear risk independently
of macroeconomic fundamentals explain most of the variation in the market. In the
long run, the market is profoundly a§ected by shocks that reallocate the rewards of a
given level of production between workers and shareholders. Productivity shocks play
a small role in historical stock market áuctuations at all horizons.


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