Stock Returns and Real Activity: A Century of Evidence



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    • Gleason Professor of Finance and Statistics, William E. Simon Graduate School of Business Administration, University of Rochester, and Research Associate, National Bureau of Economic Research. I received helpful comments from Eugene Fama. The Bradley Policy Research Center at the University of Rochester provided support for this research.


This paper analyzes the relation between real stock returns and real activity from 1889–1988. It replicates Fama's (1990) results for the 1953–1987 period using an additional 65 years of data. It also compares two measures of industrial production in the tests: (1) the series produced by Babson for 1889–1918, spliced with the Federal Reserve Board index of industrial production for 1919–1988, and (2) the new Miron and Romer (1989) index spliced with the Federal Reserve Board index in 1941. Fama's findings are robust for a much longer period—future production growth rates explain a large fraction of the variation in stock returns. The new Miron-Romer measure of industrial production is less closely related to stock price movements than the older Babson and Federal Reserve Board measures.