Moral hazard and the US stock market: analysing the 'Greenspan put'
Miller, Marcus, 1941-, Weller, Paul A. and Zhang, Lei, Dr. (2001) Moral hazard and the US stock market: analysing the 'Greenspan put'. Working Paper. Coventry: University of Warwick. Centre for the Study of Globalisation and Regionalisation. Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation) (No.83/).
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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 (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Economics
Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation
|Library of Congress Subject Headings (LCSH):||Stock exchanges -- United States, Assets (Accounting), Monetary policy -- Mathematical models, Risk (Insurance), Moral hazard|
|Series Name:||Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation)|
|Publisher:||University of Warwick. Centre for the Study of Globalisation and Regionalisation|
|Place of Publication:||Coventry|
|Official Date:||November 2001|
|Number of Pages:||26|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Bates, David S. (1991), “The Crash of ’87: Was It Expected? The Evidence from Options
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