TAILIEUCHUNG - Stock Prices, News and Economic Fluctuations

Our findings also suggest that the economic importance of options’ incentive effects is small. The size and accuracy of our data set enable sufficiently precise measurement to find compelling statistical evidence that there is an effect. However, the size of the effect is such that ordinary option grants have only small impacts on firm risk. Moreover, our tests of stock-price response to option-induced risk-taking find no evidence of costs or benefits to shareholders from this activity. The excess returns associated with the interaction of CEO option sensitivity and increased stock volatility is economically small and statistically insignificant | Stock Prices News and Economic Fluctuations Paul Beaudry and Franck Portier January 2003 Abstract A common view in macroeconomics is that business cycles can be meaningfully decomposed into fluctuations driven by demand shocks - which are shocks that have no short or long run effects on productivity - and fluctuations driven by unexpected changes in technology. In this paper we propose a means of evaluating this view and we show that it is strongly at odds with the data. In contrast we show that the data favors a view of business cycles driven primarily by a shock that does not affect productivity in the short run therefore it looks like a demand shock - but affects productivity in the long run. The structural interpretation we suggest for this shock is that it represents news about future technological opportunities. We show that this shock explains about 50 of business cycle fluctuations and therefore deserves to be acknowledged and further understood by macroeconomists. Key Words Business Cycle News Productivity Shocks JEL Classification E3 CRC University of British Columbia and NBER. Universite de Toulouse GREMAQ IDEI LEERNA Institut Universitaire de France and CEPR The authors thank Susanto Basu Larry Christiano Roger Farmer and participants at CEPR ESSIM 2002 NBER Summer Institute 2002 University of Berlin Universite du Quebec à Montreal Universite de Toulouse for helpful comments. 1 Stock Prices News and Economic Fluctuations January 2003 Abstract A common view in macroeconomics is that business cycles can be meaningfully decomposed into fluctuations driven by demand shocks - which are shocks that have no short or long run effects on productivity - and fluctuations driven by unexpected changes in technology. In this paper we propose a means of evaluating this view and we show that it is strongly at odds with the data. In contrast we show that the data favors a view of business cycles driven primarily by a shock that does not affect productivity in the short

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