| Publisher | University of Warwick | ||
|---|---|---|---|
| Format | 183.9KB PDF | Date added | 07 Sep 2001 |
| Topics | Financial Management | ||
| Downloads | 31 | ||
The risk premium in the US stock market has fallen far below its historic level, which Shiller attributes to a bubble driven by psychological factors. As an alternative explanation, this paper points 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, the paper shows that this 'insurance' - referred to as the Greenspan put - is consistent with the observation that implied volatility rises as the market falls.
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