Macro Shocks and Real US Stock Prices with Special Focus on the "Great Recession"

In this paper, we examine the effects of money supply, portfolio, aggregate spending, and aggregate supply shocks on real US stock prices in a structural vector autoregression framework using quarterly data for the period of 1947:1-2011:3. Overall, the empirical results indicate that each macro shock has important effects on real stock prices, with aggregate supply shocks playing an important role, besides portfolio shocks. The real stock price impulse responses to the various macro shocks conform to the standard present-value equity valuation model, and hence, our identification based on long-run restrictions can be viewed as appropriate. An historical decomposition indicates that the decline in the real stock prices during the "Great Recession" is mainly due to a slowdown in US productivity, after investors had decided to carry out exogenous portfolio shifts out of stocks. In general, we conclude that during the "Great Recession" the declining stock prices resulted due to a series of unfavourable shocks emanating from different sectors of the US economy.