Shaikh on stockmarket

Doug Henwood dhenwood at
Thu Jun 25 06:37:12 PDT 1998

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.



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



The Jerome Levy Economics Institute

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Paper ID: The Jerome Levy Economics Institute Paper No.


Date: September 1995

Contact: Triveni Kuchi

E-Mail: MAILTO:kuchi at

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,

E-Mail: MAILTO:kuchi at Postal: Information Specialist,

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

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