TAILIEUCHUNG - CONSUMPTION AND THE STOCK MARKET: INTERPRETING INTERNATIONAL EXPERIENCE

Islam and Watanapalachaikul (2003) showed a strong, significant long-run relationship between stock prices and macroeconomic factors (interest rate, bonds price, foreign exchange rate, price-earning ratio, market capitalization, and consumer price index) during 1992-2001 in Thailand. Hassan (2003) employed Johansen’s (1988, 1991, 1992b) and Johansen and Juselius’ (1990) multivariate cointegration techniques to test for the existence of long-term relationships between share prices in the Persian Gulf region. Using a vector-error-correction model, he also investigated the short-term dynamics of prices by testing for the existence and direction of intertemporal Granger-causality. . | NBER WORKING PAPER SERIES CONSUMPTION AND THE STOCK MARKET INTERPRETING INTERNATIONAL EXPERIENCE John Y. Campbell Working Paper 5610 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 June 1996 This paper was prepared for the Economic Council of Sweden s conference on Financial Markets and the Macroeconomy Stockholm October 6 1995. I am grateful to Lars-Erik Oller Lars Svensson and Anders Vredin for helpful comments to Luis Viceira for exceptionally able research assistance and to Barclays de Zoete Wedd Securities Limited Morgan Stanley Capital International David Barr and Paul Soderlind for providing data. This paper is part of NBER s research programs in Asset Pricing Economic Fluctuations and Growth and Monetary Economics. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research. 1996 by John Y. Campbell. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. NBER Working Paper 5610 June 1996 CONSUMPTION AND THE STOCK MARKET INTERPRETING INTERNATIONAL EXPERIENCE ABSTRACT This paper reviews the behavior of stock prices in relation to consumption. The paper lists some important stylized facts that characterize US data and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the US experience apply more generally. The paper argues that to make sense of stock market behavior one needs a model in which investors risk aversion is both high and varying such as the external habit-formation model of Campbell and Cochrane 1995 . John Y. Campbell Department of Economics Littauer Center Harvard University Cambridge MA 02138 and NBER The behavior of aggregate stock prices is a subject of enduring fascination to investors policymakers and economists. In recent years stock markets have .

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