+1 vote
asked ago in General Economics Questions by (240 points)
Here is a link to a paper I wrote on this subject. Hopefully this paper can be a good source to what my question is asking. Thank you so much everyone.
https://econteenblog.wordpress.com/2018/11/04/hypothesis-for-explaining-the-equity-premium-puzzle-and-the-success-of-the-u-s-stock-market-second-version/

1 Answer

+1 vote
answered ago by (1.4k points)
Congratulations it's a good paperwork.

Here it's my opinion.

I think that domestic savings and stock market prices are correlated because the stock market is a industry of wealth. The stock market can go up without stop increasing the number of participants or the amount of savings available due to central bank credit to intemediary banks. If everybody invests in the stock market nobody losses money and the stock market can skyrocket without brakes.

Here is the main reason of the correction of huge bubbles, which I think doesn't work very strongly looking at your paper. The last buyer gambling on the stock market losses his money, so frightened of a recession or a correction, risk adversion leads to a decrease on the stock prices growth as we are experiencing now. Anyway the stock market is a business and in a scenario of continuous economic growth there is no reason for the stock market to go down, just decrease its growth.

I think this reason is the main factor of the correlation between savings and stock market prices.

I'm sorry if my English is not perfect.

Good luck with your work.
commented ago by (240 points)
Thank you very much sir for your answer! Your English is very good, so no worries about that. If you don't mind me asking, how would the central bank's credit lead to more money being put towards investing in the stock market? I would imagine banks lending out more money to businesses through loans would lead to more investment, but I don't see how this would be invested towards stocks? Perhaps more money being lent out to people that are buying on margin? Also in terms of the correction of bubbles, when looking at graphs of gross domestic savings over time, I did see that there are times of downturns with the amount of gross domestic savings, so wouldn't a decrease in gross domestic savings for a year lead to the bubble bursting, since there would be a decrease in demand for stocks then before? Thanks again sir, and I appreciate you wishing me luck!
commented ago by (1.4k points)
Thank you for your comments. I really appreciate it sir.

Here is what I know.

Banks can invest the Central Bank loans in the stock market with a few regulations concerning management of risk, or other intitutions as companies can manage their financial position investing their profits in the stock market thank to previous investment on the whole economy.  Stock holders that receive a dividend can invest it in the stock market as well, so in my opinion every increase in the monetary base leads to an increase in the savings rate, what usually is invested in the best profitable market.

Regarding a decrease in the savings rate, I always divide an economy into profits and wages because they are the minimum terms of every economic activity. If householder's savings tend to decline, firms profits tend to rise. Thus there is no reason for the national savings to decline but foreign assets purchases, what because of financial market self regulation, could be directed as well to the stock market.

Anyway a domestic flow of money due to imports can decrease the national savings what I bet, as you mention, could decrease the stock market price because a declining demand and a higher risk adversity due to lower domestic firms profits.

I developed a modern monetary model that you can find unfinished in my questions. I finally developed an equation that manages objective rate of interest related to inflation target (that's not released in the upload because of a few reasons). You can work in the relationship between both fenomena (central bank interest rate and stock market) using it if you want. Just let me know. Thank you for the coversation sir!
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