US Share Prices and Real Supply and Demand Shocks

Using theoretical foundations, VAR restrictions are imposed allowing demand and supply sources of output movement to be distinguished and the effects of their shocks on stock prices to be analysed. Stock prices are sensitive to all shocks although the influence from the real economy to the stock market is less important than shocks that are peculiar to the market itself. Decompositions using temporary/permanent and real economy/stock market distinctions suggest that the historical contribution of demand, supply and portfolio shocks to real stock price fluctuations changes over time – a feature that is particularly evident post mid-1990s.