Monetary Policy and Mispricing in Stock Markets

Benjamin Beckers and Kerstin Bernoth ()

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the role of monetary policy in stock price misalignments and explore whether central banks can attenuate excessive mispricing as suggested by the proponents of a “leaning against the wind” monetary policy. Decomposing stock prices into expected excess dividends, an equity risk premium, and a mispricing component, we find that prices fall more strongly in response to an increase in the policy rate than what is implied by their underlying fundamentals. This systematic overreaction suggests that tighter monetary policy may contain emerging asset price misalignments. Our findings are at odds with the predictions of a rational bubble framework, but can be explained by mispricing arising from false subjective expectations of irrational investors.

Keywords: Asset pricing; bubbles; leaning against the wind; mispricing; monetary policy; stock prices (search for similar items in EconPapers)
JEL-codes: E44 E52 G12 G14 (search for similar items in EconPapers)
Date: 2023-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Monetary Policy and Mispricing in Stock Markets (2024)
Working Paper: Monetary Policy and Mispricing in Stock Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:120502

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