Arbeitspapier
Monetary policy and mispricing in stock markets
This paper investigates whether central banks can attenuate excessive mispricing in stocks as suggested by the proponents of a "leaning against the wind" (LATW) monetary policy. For this, we decompose stock prices into a fundamental component, a risk premium, and a mispricing component. We argue that mispricing can arise for two reasons: (i) from false subjective expectations of investors about future fundamentals and equity premia; and (ii) from the inherent indeterminacy in asset pricing in line with rational bubbles. We show that the response of the excessive stock price component to a monetary policy shock is ambiguous in both the short- and long-run, and depends on the nature of the mispricing. Subsequently, we evaluate the scope for a LATW policy empirically by employing a time-varying coefficient VAR with a flexible identification scheme based on impact and long-run restrictions using data for the S&P500 index from 1962Q1 to 2014Q4. We find that a contractionary monetary policy shock in fact lowers stock prices beyond what is implied by the response of their underlying fundamentals.
- Sprache
-
Englisch
- Erschienen in
-
Series: DIW Discussion Papers ; No. 1605
- Klassifikation
-
Wirtschaft
Financial Markets and the Macroeconomy
Monetary Policy
Asset Pricing; Trading Volume; Bond Interest Rates
Information and Market Efficiency; Event Studies; Insider Trading
- Thema
-
asset pricing
bubbles
financial stability
leaning against the wind
mispricing
monetary policy
time-varying coefficient VAR
zero and sign restrictions
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Beckers, Benjamin
Bernoth, Kerstin
- Ereignis
-
Veröffentlichung
- (wer)
-
Deutsches Institut für Wirtschaftsforschung (DIW)
- (wo)
-
Berlin
- (wann)
-
2016
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:44 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Beckers, Benjamin
- Bernoth, Kerstin
- Deutsches Institut für Wirtschaftsforschung (DIW)
Entstanden
- 2016
Ähnliche Objekte (12)
Monetary Policy and Asset Mispricing
Monetary policy implications of financial innovation: In-depth analysis
Implications for the euro area of divergent monetary policy stances by the Fed and the ECB: The role of financial spillovers. In-depth analysis
Zinsspreads auf europäische Staatsanleihen: Implikationen und Lehren aus der europäischen Schuldenkrise
Keine Angst vor Inflationsgespenstern aus den USA
Fool the markets?: Creative accounting, fiscal transparency and sovereign risk premia
Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia
The Eurosystem's agreement on Net Financial Assets (ANFA): Covert monetary financing or legitimate portfolio management?
Weak inflation and threat of deflation in the euro area: Limits of conventional monetary policy
ECB and Fed monetary policy measures against the economic effects of the coronavirus pandemic have little effect
The impacts of global risk and US monetary policy on US Dollar exchange rates and excess currency returns
The performance of the Euribor futures market: Effficiency and the impact of ECB policy announcements
Monetary Policy and Asset Mispricing
Monetary policy implications of financial innovation: In-depth analysis
Implications for the euro area of divergent monetary policy stances by the Fed and the ECB: The role of financial spillovers. In-depth analysis
Zinsspreads auf europäische Staatsanleihen: Implikationen und Lehren aus der europäischen Schuldenkrise
Keine Angst vor Inflationsgespenstern aus den USA
Fool the markets?: Creative accounting, fiscal transparency and sovereign risk premia
Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia
The Eurosystem's agreement on Net Financial Assets (ANFA): Covert monetary financing or legitimate portfolio management?
Weak inflation and threat of deflation in the euro area: Limits of conventional monetary policy
ECB and Fed monetary policy measures against the economic effects of the coronavirus pandemic have little effect
The impacts of global risk and US monetary policy on US Dollar exchange rates and excess currency returns
The performance of the Euribor futures market: Effficiency and the impact of ECB policy announcements
Monetary Policy and Asset Mispricing
Monetary policy implications of financial innovation: In-depth analysis
Implications for the euro area of divergent monetary policy stances by the Fed and the ECB: The role of financial spillovers. In-depth analysis
Zinsspreads auf europäische Staatsanleihen: Implikationen und Lehren aus der europäischen Schuldenkrise
Keine Angst vor Inflationsgespenstern aus den USA
Fool the markets?: Creative accounting, fiscal transparency and sovereign risk premia
Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia
The Eurosystem's agreement on Net Financial Assets (ANFA): Covert monetary financing or legitimate portfolio management?
Weak inflation and threat of deflation in the euro area: Limits of conventional monetary policy
ECB and Fed monetary policy measures against the economic effects of the coronavirus pandemic have little effect
The impacts of global risk and US monetary policy on US Dollar exchange rates and excess currency returns