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Rising Stocks during Lockdown Economic Recessions: Explaining the Phenomenon

Vasconcelos Costa, André (2021): Rising Stocks during Lockdown Economic Recessions: Explaining the Phenomenon.

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Abstract

Whilst facing an economic recession, stock prices have been rising consistently since late March of 2020, which has been viewed by many as paradoxical and has led some to consider that the stock market does not represent the real economy. The aim of this paper is to offer a simple, coherent explanation which is capable of showing why this is actually a phenomenon to be expected during the implementation of lockdown measures. The theoretical tool through which this is accomplished is the Life Cycle/Permanent Income Hypothesis and its consumption smoothing implications. I show that the exceptional inability to smooth consumption under current circumstances has been the cause of unprecedented increases in savings which find the stock market as one of their natural destinations.

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