IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v44y2009i05p1125-1147_99.html
   My bibliography  Save this article

Stock Market Mispricing: Money Illusion or Resale Option?

Author

Listed:
  • Chen, Carl R.
  • Lung, Peter P.
  • Wang, F. Albert

Abstract

We examine two hypotheses to explain stock mispricing: i) the money illusion hypothesis (Modigliani and Cohn (1979)) and ii) the resale option hypothesis (Scheinkman and Xiong (2003)). We find that the money illusion hypothesis may explain the level, but not the volatility, of mispricing in the U.S. market. In contrast, the stock resale option hypothesis, which stems from heterogeneous beliefs about future dividend growth rates and short-sale constraints, can explain both the level and the volatility of mispricing. The evidence suggests that while the two hypotheses complement each other in explaining the level of mispricing, the resale option hypothesis provides a more coherent explanation for asset price bubbles, in which extraordinarily high price levels are often accompanied by excessive volatility and frenzied trading.

Suggested Citation

  • Chen, Carl R. & Lung, Peter P. & Wang, F. Albert, 2009. "Stock Market Mispricing: Money Illusion or Resale Option?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(05), pages 1125-1147, October.
  • Handle: RePEc:cup:jfinqa:v:44:y:2009:i:05:p:1125-1147_99
    as

    Download full text from publisher

    File URL: http://journals.cambridge.org/abstract_S0022109009990238
    File Function: link to article abstract page
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Liu, Dehong & Gu, Hongmei & Xing, Tiancai, 2016. "The meltdown of the Chinese equity market in the summer of 2015," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 504-517.
    2. Tom Engsted & Thomas Q. Pedersen, 2016. "The predictive power of dividend yields for future infl?ation: Money illusion or rational causes?," CREATES Research Papers 2016-11, Department of Economics and Business Economics, Aarhus University.
    3. Gwangheon Hong & Bong Lee, 2013. "Does Inflation Illusion Explain the Relation between REITs and Inflation?," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 123-151, July.
    4. repec:kap:jrefec:v:55:y:2017:i:3:d:10.1007_s11146-016-9587-7 is not listed on IDEAS
    5. Chen, Sichong, 2012. "The predictability of aggregate Japanese stock returns: Implications of dividend yield," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 284-304.
    6. Acker, Daniella & Duck, Nigel W., 2013. "Inflation illusion and the US dividend yield: Some further evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 235-254.
    7. repec:eee:finmar:v:37:y:2018:i:c:p:52-69 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:44:y:2009:i:05:p:1125-1147_99. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters). General contact details of provider: http://journals.cambridge.org/jid_JFQ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.