The Aggregate Economic Costs of US Stock Mispricing

Ron Bird, Gordon Menzies, Peter Dixon and Maureen Rimmer

No 4, Working Paper Series from The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney

Abstract: Stock mispricing can lead to misallocation and wastage of capital both inter-temporally and across sectors. The USAGE model for the United States is used to quantify economic costs under a number of mispricing scenarios, made operational by shocking Tobin’s q. A two-year Communications and Technology investment boom increases consumption by a Net Present Value (NPV) amount of nearly one per cent, partly due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, this gain in consumption is more than offset, leading to a loss of nearly one-half of a per cent. A protracted ‘capital strike’ across the whole economy subsequent to the boom – mimicking financial distress from a burst bubble – shaves around 7 per cent off consumption if the strike lasts for 3 years, and 10 per cent if it lasts for 5 years.

Pages: 47 pages
Date: 2009-08-01
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