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Working Paper
A Stock Return Decomposition Using Observables
We propose a method to decompose stock returns period by period. First, we argue that one can directly estimate expected stock returns from securities available in modern financial markets (using the real yield curve and the Martin (2017) equity risk premium). Second, we derive a return decomposition which is based on stock price elasticities with respect to expected returns and expected dividends. We calculate elasticities from dividend futures. Our decomposition is an alternative to the Campbell-Shiller log-linearization which relies on an assumption about the log-linearization constant. An ...
Working Paper
Limited Participation in Equity Markets and Business Cycles
This paper studies how the rise in US households' participation in equity markets affects the transmission of macroeconomic shocks to the economy. I embed limited participation into a New Keynesian framework for the US economy to analyze the individual and aggregate effects of higher participation. I derive three main results. First, participants are relatively more responsive to shocks than nonparticipants. Second, higher participation reduces the effectiveness of monetary policy. Third, with higher participation the economy becomes less volatile. I contrast key predictions of my model with ...
Journal Article
Do Changes in the Stock Market Affect Consumer and Business Confidence?
I find that measures of consumer and business confidence respond to stock market surprises. My evidence points to a confidence channel from financial conditions to the real economy. By signaling strong future incomes and profits, high equity valuations boost consumer and business confidence, which in turn stimulates real spending today. These relationships highlight a risk that the recent stock market decline could sap confidence, with adverse effects on real activity.
Working Paper
Taxes and the Fed : Theory and Evidence from Equities
We provide a critical theoretical and empirical analysis that suggests a key driver of fiscal effects on equity markets is the Federal Reserve. For the Post-1980 era, tax cuts lead to higher cash flow news and higher discount rates. The discount rate news tends to dominate such that tax cuts are associated with lower equity returns. This result is flipped for the Pre-1980 era. Our results are confirmed across multiple measures of tax shocks (narrative, SVAR, municipal bonds, etc.) at different frequencies (daily, quarterly, annual). We motivate our empirical findings with a standard New ...