Scandinavian Working Papers in Economics

Nationaløkonomisk tidsskrift,
Nationaløkonomisk Forening

Equity prices, share price valuation, crashes and depressions

2003, Volume 2003, issue 1, pp. 3-34

Jakob B. Madsen
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Jakob B. Madsen: Institute of Economics and EPRU, University of Copenhagen

Abstract: The recent controversy about whether share prices reflect their fundamental value hinges, to a large extent, on expected returns to shares. This paper argues that returns to shares are determined endogenously by macroeconomic factors and shows that annualrealreturnsto shares converge to 8-10% in the long run, but have fluctuated on decennial frequencies due to fluctuations in factor shares and the marginal productivity of capital. Using this evidence it is argued that current share prices still need further downward correction and that the decline in share prices since 2000 will have large macroeconomic implications.

Keywords: macroeconomic; equity prices; share price valuation

JEL-codes: A10

Language: English

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