Stock returns and real activity: is there still a connection?

Applied Financial Economics, 2000, 10, 379-387

Several studies published in the early 1990s found that a large fraction of stock return variations can be explained by future values of measures of real activity in the United States by using data samples from the 1950s to the 1980s. This paper presents evidence that the relation does not hold up any more during the most recent stock market boom since the early 1980s indicating that stock returns ceased to lead real economic activity. Therefore, the current stock market boom seems to be fundamentally different from the ® rst stock market boom after World War II from the late 1940s to the mid-1960s, when the stock market was clearly leading real activity. A possible explanation of our results is the existence of bubbles or fads which make movements of stock prices more independent from subsequent changes in real activity.

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