[OPE-L:5386] Re: the bursting bubble and the U.S. working class

From: Allin Cottrell (cottrell@wfu.edu)
Date: Sun Apr 22 2001 - 23:29:41 EDT

On Tue, 17 Apr 2001, Gerald_A_Levy wrote:

> * What, if anything, is different about the current
>   bubble in the U.S. stock market?

What bubble?  I'm teaching econometrics this semester, and to
illustrate the "error correction" model specification I ran an error
correction model of the Dow-Jones average, using quarterly data,
1959-2000.  I hypothesized that in equilibrium the Dow ought to be
proportional to the value of an annuity defined as the value of
after-tax corporate profits divided by a suitable long-term interest
rate (i.e. the present value of the hypothetical stream of current
profits, maintained indefinitely).  The model gave an equilibrium
proportionality factor of about 0.90 -- i.e. the "right" value for the
Dow index is about 90% of the present value of the corporate profit
stream, in billions of dollars.  We're currently just about at that.
For most of the 1990s the Dow was below equilibrium, and busy catching

Allin Cottrell.

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