Monetary environment and market inefficiency

Yacine Hammami

International Journal of Monetary Economics and Finance, 2012, vol. 5, issue 1, 24-37

Abstract: This paper contends that abundant liquidity in the economy might be an important determinant of market inefficiency. Restrictive monetary periods are characterised by high bank lending growth compared with expansive monetary periods. Therefore, if excess liquidity is a cause of market inefficiency, the latter is expected to come out essentially in restrictive monetary environments. Consistent with this intuition, empirical tests here highlight that expected stock returns in the USA are driven by fundamentals only in expansive monetary phases whereas investor sentiment seems to be the most important driving force in restrictive monetary environments.

Keywords: asset pricing models; bank lending; monetary policy; market efficiency; overreaction; market inefficiency; liquidity; USA; United States. (search for similar items in EconPapers)
Date: 2012
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