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The Economic Costs of US Stock Mispricing

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Abstract

The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobin's q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro cyclical. A two year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one half of a per cent. A 5 year 'capital strike' across the whole economy subsequent to the boom - mimicking financial distress from a burst bubble - shaves around 10 per cent off consumption.

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  • G. Menzies & R. Bird & P. Dixon & M. Rimmer, 2010. "The Economic Costs of US Stock Mispricing," Centre of Policy Studies/IMPACT Centre Working Papers g-204, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-204
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    Cited by:

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    2. J. A. Giesecke & W. J. Burns & A. Barrett & E. Bayrak & A. Rose & P. Slovic & M. Suher, 2012. "Assessment of the Regional Economic Impacts of Catastrophic Events: CGE Analysis of Resource Loss and Behavioral Effects of an RDD Attack Scenario," Risk Analysis, John Wiley & Sons, vol. 32(4), pages 583-600, April.
    3. Gordon Menzies & Ron Bird & Peter B. Dixon & Maureen T. Rimmer, 2011. "Asset Price Regulators, Unite: You have the Macroeconomy to Win and the Microeconomic Losses are Small," The Economic Record, The Economic Society of Australia, vol. 87(278), pages 449-464, September.
    4. Majumder, Debasish, 2012. "When the market becomes inefficient: Comparing BRIC markets with markets in the USA," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 84-92.
    5. Majumder, Debasish, 2013. "Towards an efficient stock market: Empirical evidence from the Indian market," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 572-587.

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    More about this item

    Keywords

    Financial crises; exchange rates; macroeconomic modeling; stock market;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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