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Does Equity Mispricing Influence Household and Firm Decisions?

  • James Hansen

    (Reserve Bank of Australia)

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    Qualitative literature on equity price bubbles has often emphasised the effects of mispriced equity on economic decisions. This paper investigates this issue quantitatively using two ideas. The first is that equity mispricing is transitory, and has no long-run effects on economic outcomes. The second is that there exist observables that are correlated with mispricing, but uncorrelated with changes in fundamentals. Estimates of mispricing appear to accord well with periods described as bubble episodes for the US. The effects of these shocks on household decisions are found to be statistically significant.

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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2011-06.

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    Date of creation: Dec 2011
    Date of revision:
    Handle: RePEc:rba:rbardp:rdp2011-06
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    6. Lee, Bong-Soo, 1995. "The Response of Stock Prices to Permanent and Temporary Shocks to Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 1-22, March.
    7. Refet S. Gürkaynak, 2005. "Econometric tests of asset price bubbles: taking stock," Finance and Economics Discussion Series 2005-04, Board of Governors of the Federal Reserve System (U.S.).
    8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
    9. Liam Gallagher, 1999. "A multi-country analysis of the temporary and permanent components of stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 129-142.
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