Stock market booms in economies damaged during World War II

Some studies find that real equity prices in economies damaged during World War II tended to rise sharply at the beginning of actual damage taking place during the war. This paper introduces an empirically plausible degree of persistence from the impact of World War II and demonstrates that stock market booms in economies damaged during the war are consistent with an equilibrium model of asset pricing.

► We estimate the impact on per capita real GDP and consumption and the real stock price index on economies damaged during WWII. ► We introduce empirical characteristics into Barro’s (2006, QJE) disaster model and derive a closed form solution to equity prices. ► We compute the equilibrium equity prices based on the estimated properties of per capita real GDP and consumption. ► We conclude that the estimated stock market booms are consistent with those simulated from the models we consider.