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Moral Hazard and the US Stockmarket: Analyzing the "Greenspan Put"


  • Marcus H. Miller

    () (Peterson Institute for International Economics)

  • Paul Weller

    () (Peterson Institute for International Economics)

  • Lei Zhang

    () (Peterson Institute for International Economics)


When the risk premium in the US stock market fell far below its historic level, Shiller (2000) attributed this to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve, which leads investors into the erroneous belief that they are insured against downside risk. By allowing for partial credibility and state dependent risk aversion, we show that this "insurance" - referred to as the Greenspan put - is consistent with the observation that implied volatility rises as the market falls. Our bubble, like Shiller's, involves market psychology, but what we describe is not so much "irrational exuberance" as exaggerated faith in the stabilizing power of Mr. Greenspan.

Suggested Citation

  • Marcus H. Miller & Paul Weller & Lei Zhang, 2002. "Moral Hazard and the US Stockmarket: Analyzing the "Greenspan Put"," Working Paper Series WP02-1, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp02-1

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    References listed on IDEAS

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