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Speculative excess and the Federal Reserve's response

Listed author(s):
  • John H. Huston
Registered author(s):

    Purpose - The purpose of this paper is to develop a single variable indicative of the state of market speculation; to determine whether the Federal Reserve has attempted to quell speculation when it has been most rampant and whether such attempts were successful. Design/methodology/approach - The paper examine the literature on market “bubbles” and the Federal Reserve's treatment of them; to determine a single variable reflective of market speculation via principle components integration; to examine the Federal Reserve's interaction with market speculation by estimating a vector autoregression version of the Taylor rule. Findings - It is possible to construct a single variable representative of market speculation, termed the index of speculative excess that correlates well with standard views of market excess; the Federal Reserve did attempt to retard market speculation during the three major bull markets of the past century; monetary policy did little to inhibit market speculation. Originality/value - Highly original in the construction of a single variable reflective of market speculation; joins the ongoing debate as to the extent of Federal Reserve concern with speculative activity and the Fed's poor record of accomplishment in this area.

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    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 26 (2009)
    Issue (Month): 1 (March)
    Pages: 46-61

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    Handle: RePEc:eme:sefpps:v:26:y:2009:i:1:p:46-61
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    1. Hsieh, David A & Miller, Merton H, 1990. " Margin Regulation and Stock Market Volatility," Journal of Finance, American Finance Association, vol. 45(1), pages 3-29, March.
    2. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
    3. Hardouvelis, Gikas A, 1990. "Margin Requirements, Volatility, and the Transitory Components of Stock Prices," American Economic Review, American Economic Association, vol. 80(4), pages 736-762, September.
    4. De Long, J. Bradford & Shleifer, Andrei, 1991. "The stock market bubble of 1929: evidence from clsoed-end mutual funds," The Journal of Economic History, Cambridge University Press, vol. 51(03), pages 675-700, September.
    5. Kumar, Raman & Ferris, Stephen P & Chance, Don M, 1991. "The Differential Impact of Federal Reserve Margin Requirements on Stock Return Volatility," The Financial Review, Eastern Finance Association, vol. 26(3), pages 343-366, August.
    6. J. Bradford DeLong & Konstantin Magin, 2006. "A Short Note on the Size of the Dot-Com Bubble," NBER Working Papers 12011, National Bureau of Economic Research, Inc.
    7. Jeremy J. Siegel, 2003. "What Is an Asset Price Bubble? An Operational Definition," European Financial Management, European Financial Management Association, vol. 9(1), pages 11-24.
    8. Pastor, Lubos & Veronesi, Pietro, 2006. "Was there a Nasdaq bubble in the late 1990s?," Journal of Financial Economics, Elsevier, vol. 81(1), pages 61-100, July.
    9. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-1214, December.
    10. Rappoport, Peter & White, Eugene N., 1993. "Was There a Bubble in the 1929 Stock Market?," The Journal of Economic History, Cambridge University Press, vol. 53(03), pages 549-574, September.
    11. Bennett T. McCallum & Edward Nelson, 1999. "Performance of Operational Policy Rules in an Estimated Semiclassical Structural Model," NBER Chapters,in: Monetary Policy Rules, pages 15-56 National Bureau of Economic Research, Inc.
    12. Bill Dupor & Timothy Conley, 2004. "The Fed Response to Equity Prices and Inflation," American Economic Review, American Economic Association, vol. 94(2), pages 24-28, May.
    13. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    14. Burton G. Malkiel, 2004. "Models Of Stock Market Predictability," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(4), pages 449-459.
    15. Robertson, John C & Tallman, Ellis W, 2001. "Improving Federal-Funds Rate Forecasts in VAR Models Used for Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 324-330, July.
    16. Wheelock,David C., 2004. "The Strategy and Consistency of Federal Reserve Monetary Policy, 1924–1933," Cambridge Books, Cambridge University Press, number 9780521531399, Diciembre.
    17. Christian Weller, 2002. "Policy on the margin: Evaluating the impact of margin debt requirements on stock valuations," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(1), pages 1-15, March.
    18. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
    19. Schwert, C.W., 1989. "Margin Requirements And Stock Volatility," Papers t6, Columbia - Center for Futures Markets.
    20. repec:hrv:faseco:30703980 is not listed on IDEAS
    21. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    22. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-948, November.
    23. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    24. Grube, R Corwin & Joy, O Maurice & Panton, Don B, 1979. "Market Responses to Federal Reserve Changes in the Initial Margin Requirement," Journal of Finance, American Finance Association, vol. 34(3), pages 659-674, June.
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