Moral Hazard and The US Stock Market: Analysing the ‘Greenspan Put‘

Marcus Miller; Paul Weller; Lei Zhang

doi:10.1111/1468-0297.00029

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Moral Hazard and The US Stock Market: Analysing the ‘Greenspan Put‘

Journal article

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Moral Hazard and The US Stock Market: Analysing the ‘Greenspan Put‘

Marcus Miller, Paul Weller and Lei Zhang

The Economic journal (London), Vol.112(478), pp.C171-C186

03/2002

DOI: 10.1111/1468-0297.00029

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Abstract

When the risk premium in the US stock market fell substantially, Shiller (2000) attributed this to a bubble driven by psychological factors. An alternative explanation is 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 is not so much ‘irrational exuberance' as exaggerated faith in the stabilising power of Mr. Greenspan.

Details

Title: Subtitle: Moral Hazard and The US Stock Market: Analysing the ‘Greenspan Put‘
Creators: Marcus Miller - University of Warwick
Paul Weller - University of Iowa
Lei Zhang - University of Warwick
Resource Type: Journal article
Publication Details: The Economic journal (London), Vol.112(478), pp.C171-C186
DOI: 10.1111/1468-0297.00029
ISSN: 0013-0133
eISSN: 1468-0297
Language: English
Date published: 03/2002
Academic Unit: Finance
Record Identifier: 9984963057102771

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