2020

Junttila, Juha-Pekka

We find that after the Global Financial Crisis (GFC) since 2008 the standard dividend discount model of the stock market behaviour has not been operational as such in the European and US stock markets when the nominal and/or real short-term interest rates have been below zero or at the zero lower bound. However, when we augment the discount model with relevant contemporaneous observations on stock market and macroeconomic uncertainty indicators, the main macro factors in the discount model retain their explanatory power in the valuation of common stocks. We also find that the current extraordinarily serious threat on future real economic activity development caused by the COVID-19 crisis is the main factor affecting also the deep dive in the valuation of stock market assets, both in the European and US data. Nevertheless, based on our results, both the nonlinear effects from stock market tail risks, reflecting investors' fears of rare disasters, and from unconventional monetary policy actions have to be accounted for in order to reach the final effects of worsening future real economic prospects in the discounting behaviour of stock market investors. According to our results it also seems that the most relevant remedy for the current crisis are the unconventional monetary policy actions from the stock market discounting point of view.