Stock Prices, News, and Economic Fluctuations
American Economic Review · 2006 · Volume 96 · Issue 4
Abstract
We show that the joint behavior of stock prices and TFP favors a view of business cycles driven largely by a shock that does not affect productivity in the short run and therefore does not look like a standard technology shock but affects productivity with substantial delay and therefore does not look like a monetary shock. One structural interpretation for this shock is that it represents news about future technological opportunities which is first captured in stock prices. This shock causes a boom in consumption, investment, and hours worked that precedes productivity growth by a few years, and explains about 50 percent of business cycle fluctuations. (JEL G12, E32, E44)
Keywords
Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Information and Market Efficiency, Event Studies, Insider Trading
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