Shaikh on stockmarket

[Doug Henwood]

Anwar Shaikh's paper on the stock market is now electronically available. I
don't agree with it - his effort to dismiss any psychological explanation
of stock prices seems almost scriptural in its orthodoxy (proving once
again that bourgeois economics and strict Marxian economics have a lot in
common), and his model looks like a roundabout way of capturing business
cycle effects - but he's always worth reading.

Doug

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     "The Stock Market and the Corporate Sector:  A Profit-Based

      Approach"

      BY: ANWAR M. SHAIKH

            The Jerome Levy Economics Institute

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          Paper ID: The Jerome Levy Economics Institute Paper No.

                    146

          Date:     September 1995

          Contact:  Triveni Kuchi

          E-Mail:   MAILTO:kuchi at levy.org

          Postal:   The Jerome Levy Economics Institute, Bard

                    College, Blithewood, Annandale-on-Hudson, NY

                    12504 USA

          Phone:    (914) 758-7729

          Fax:      (914) 758-1149

     HARD COPY PAPER REQUESTS:  Please contact Triveni Kuchi,

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     The Jerome Levy Economics Institute, Bard College, Blithewood,

     Annandale-on-Hudson, NY 12504 Phone: (914) 758-7729,

     Fax: (914) 758-1149

     This paper shows that the empirical movements of stock prices

     can be explained directly by fundamentals. The real stock

     market rate of return is shown to closely track the real

     incremental rate of profit of the corporate sector, with the

     two rates displaying similar means and standard deviations.

     It is argued that the two are linked by capital flows between

     the sectors through a process we call "turbulent arbitrage".

     Actual equity prices closely track the prices closely track

     the prices warranted by this model, and unlike the standard

     results, are less volatile than the warranted ones. The

     theoretical approach taken in this paper implies that the

     incremental profit rate is the required rate of return for

     the stock market return. The observed volatility on stock

     market returns and prices arises from the fact that the

     required rate is itself highly volatile, driven by cyclical

     and other short term fluctuations in aggregate demand. It is

     then easy to see why conventional theoretical models, which

     typically assume constant required rates of return (discount

     rates) and constant dividend growth rates, are largely unable

     to explain the movements in stock prices. On the other hand,

     since the incremental rate of profit (net of interest) is

     essentially the change in earnings normalized by investment,

     the findings of this paper accord well the experience "on the

     street" that stock price movements are driven by interest

     rates and changes in earnings.

     JEL Classification: G12