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The Aggregate Economic Costs of US Stock Mispricing

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Stock mispricing can lead to misallocation and wastage of capital both inter-temporally and across sectors. The USAGE model for the United States is used to quantify economic costs under a number of mispricing scenarios, made operational by shocking Tobin’s q. A two-year Communications and Technology investment boom increases consumption by a Net Present Value (NPV) amount of nearly one per cent, partly due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, this gain in consumption is more than offset, leading to a loss of nearly one-half of a per cent. A protracted ‘capital strike’ across the whole economy subsequent to the boom – mimicking financial distress from a burst bubble – shaves around 7 per cent off consumption if the strike lasts for 3 years, and 10 per cent if it lasts for 5 years.

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Paper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 4.

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Length: 47 pages
Date of creation: 01 Aug 2009
Date of revision:
Handle: RePEc:uts:pwcwps:4

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