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Interpreting equity price movements since the start of the financial crisis

Author

Listed:
  • Inkinen, Mika

    (Bank of England)

  • Stringa, Marco

    (Bank of England)

  • Voutsinou, Kyriaki

    (Bank of England)

Abstract

Equity markets have experienced large price movements since the financial crisis began in mid-2007. Understanding the factors that drive equity prices is important for policymakers as they may contain information about the future course of the economy. This article uses a simple model to decompose recent equity price movements into changes in earnings expectations, the risk-free rate and the equity risk premium. Indicative evidence suggests that changes in earnings expectations can account for some, but by no means all, of the shifts in equity prices since mid-2007. Policy actions by central banks and governments are likely to have supported equity prices, for example by lowering government bond yields and reducing the likelihood of more severe downside risks to the economy materialising. The latter may also have contributed to a fall in the implied level of the equity risk premium, which had increased sharply during the financial crisis.

Suggested Citation

  • Inkinen, Mika & Stringa, Marco & Voutsinou, Kyriaki, 2010. "Interpreting equity price movements since the start of the financial crisis," Bank of England Quarterly Bulletin, Bank of England, vol. 50(1), pages 24-33.
  • Handle: RePEc:boe:qbullt:0013
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2009/interpreting-recent-movements-in-sterling.pdf?la=en&hash=ED4957CD48CC7E78148BA005FAF8FB8EEB3033D8
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    Citations

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    Cited by:

    1. Michael A. S. Joyce & Nick McLaren & Chris Young, 2012. "Quantitative easing in the United Kingdom: evidence from financial markets on QE1 and QE2," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 28(4), pages 671-701, WINTER.
    2. Colin Ellis, 2014. "Break-even maturity as a guide to financial distress," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(4), December.
    3. Joyce, Michael & Lasaosa, Ana & Stevens , Ibrahim & Tong, Matthew, 2010. "The financial market impact of quantitative easing," Bank of England working papers 393, Bank of England.
    4. Haddow, Abigail & Hare, Chris & Hooley, John & Shakir, Tamarah, 2013. "Macroeconomic uncertainty: what is it, how can we measure it and why does it matter?," Bank of England Quarterly Bulletin, Bank of England, vol. 53(2), pages 100-109.
    5. Martin Casta, 2021. "Deriving Equity Risk Premium Using Dividend Futures," Working Papers 2021/1, Czech National Bank.
    6. Saleheen, Jumana & Levina, Iren & Melolinna, Marko & Tatomir, Srdan, 2017. "The financial system and productive investment: new survey evidence," Bank of England Quarterly Bulletin, Bank of England, vol. 57(1), pages 4-17.
    7. Michael A. S. Joyce & Ana Lasaosa & Ibrahim Stevens & Matthew Tong, 2011. "The Financial Market Impact of Quantitative Easing in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 113-161, September.
    8. de Vincent-Humphreys, Rupert & Noss, Joseph, 2012. "Estimating probability distributions of future asset prices: empirical transformations from option-implied risk-neutral to real-world density functions," Bank of England working papers 455, Bank of England.
    9. Joyce, Michael & Tong, Matthew & Woods, Robert, 2011. "The United Kingdom’s quantitative easing policy: design, operation and impact," Bank of England Quarterly Bulletin, Bank of England, vol. 51(3), pages 200-212.

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