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Moral Hazard and the US Stock Market: The Idea of a 'Greenspan Put'

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  • Miller, Marcus
  • Weller, Paul

Abstract

The risk premium in the US stock market has fallen far below its historic level, which Shiller (2000) attributes to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve which leads investors into the erroneous belief that they are insured against downside risk. By allowing for partial credibility and state dependent risk aversion, we show that this ?insurance? ? referred to as the Greenspan put ? is consistent with the observation that implied volatility rises as the market falls. Our bubble, like Shiller?s, involves market psychology: but what we describe is not so much ?irrational exuberance? as exaggerated faith in the stabilising power of Mr. Greenspan.

Suggested Citation

  • Miller, Marcus & Weller, Paul, 2001. "Moral Hazard and the US Stock Market: The Idea of a 'Greenspan Put'," CEPR Discussion Papers 3041, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3041
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    References listed on IDEAS

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    1. Detken, Carsten & Smets, Frank, 2004. "Asset price booms and monetary policy," Working Paper Series 364, European Central Bank.
    2. Laurian Lungu & Patrick Minford, 2006. "Explaining The Equity Risk Premium," Manchester School, University of Manchester, vol. 74(6), pages 670-700, December.

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    More about this item

    Keywords

    Asset bubble; Monetary policy; Greenspan put; risk premium;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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