Does Equity Mispricing Influence Household and Firm Decisions?

James Hansen
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James Hansen: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: 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.

Keywords: asset price bubbles; structural identification; transitory shocks; error correction models (search for similar items in EconPapers)
JEL-codes: C36 E21 G11 G12 (search for similar items in EconPapers)
Date: 2011-12
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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2011-06

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