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Does Equity Mispricing Influence Household and Firm Decisions?

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  • James Hansen

    (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.

Suggested Citation

  • James Hansen, 2011. "Does Equity Mispricing Influence Household and Firm Decisions?," RBA Research Discussion Papers rdp2011-06, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2011-06
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2011/pdf/rdp2011-06.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    asset price bubbles; structural identification; transitory shocks; error correction models;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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