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Working Paper
Real Business Cycles, Animal Spirits, and Stock Market Valuation
This paper develops a real business cycle model with five types of fundamental shocks and one "equity sentiment shock" that captures animal spirits-driven fluctuations. The representative agent's perception that movements in equity value are partly driven by sentiment turns out to be close to self-fulfilling. I solve for the sequences of shock realizations that allow the model to exactly replicate the observed time paths of U.S. consumption, investment, hours worked, the stock of physical capital, capital's share of income, and the S&P 500 market value from 1960.Q1 onwards. The ...
Report
There Is No Excess Volatility Puzzle
We present two valuation models which we use to account for the annual data on price per share and dividends per share for the CRSP Value-Weighted Index from 1929 to 2023. We show that it is a simple matter to account for these data based purely on a model of variation over time in the expected ratio of dividends per share to aggregate consumption under two conditions. First, investors must receive news shocks regarding the expected ratio of dividends per share to aggregate consumption in the long run. Second, the discount rate used to evaluate the impact of this news on the current price per ...