Moral hazard and the US stock market: the idea of a 'greenspan put'
Miller, Marcus, 1941-, Weller, Paul A. and Zhang, Lei, Dr. (2001) Moral hazard and the US stock market: the idea of a 'greenspan put'. Discussion Paper. Centre for Economic Policy Research (Great Britain), London.
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The risk premium in the US stock market has fallen far below its historic level, which Shiller (2000) attributes 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 stabilising power of Mr. Greenspan.
|Item Type:||Working or Discussion Paper (Discussion Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Greenspan, Alan, 1926- , Moral hazard -- United States, Stock exchanges -- United States, Risk (Insurance) -- United States, Monetary policy -- United States|
|Series Name:||Discussion paper (Centre for Economic Policy Research (Great Britain))|
|Publisher:||Centre for Economic Policy Research (Great Britain)|
|Place of Publication:||London|
|Number of Pages:||30|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC)|
|Grant number:||R000239216 (ESRC)|
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