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2017 | OriginalPaper | Chapter

7. Stock Price Returns, Volatility and Costly Asset Price Boom–Bust Episodes

Authors : Nombulelo Gumata, Eliphas Ndou

Published in: Bank Credit Extension and Real Economic Activity in South Africa

Publisher: Springer International Publishing

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Abstract

• Understand how stock market price returns and volatility exert different impacts on macroeconomic variables.
• Distinguish between the adverse effects of stock price volatility shocks and those exerted by a positive monetary policy shock.
• Assess the impact of unexpected stock returns shocks on inflation and economic growth.
• Establish how the contributions of stock price returns and volatility reinforce each other.
• Understand in which periods different techniques identify asset price booms and busts.
• Learn what the Taylor rule suggests about monetary policy settings during asset price booms.
• Assess whether all booms in South Africa are followed by costly busts. In cases where they are, the cumulative output costs and the severity of equity price and house price busts.

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previous chapter Capital Flows and the Reallocation of Credit from Companies

next chapter The Interaction Between Credit Conditions, Monetary Policy and Economic Activity

See IMF (2003), Cecchetti (2012, 2006), Yavas (2013), Xiong (2013), amongst others

See Kim and Yang (2009) for further details on dealing with the issue of simultaneity between capital inflows and asset prices.

See Fatas et al. (Fatas et al. 2009) for further details.

International evidence shows that the average house price bust lasts for two and a half years, whereas stock price busts last for about one and a half years. The cumulative decline in output below trend is roughly 4.25 percent for the first year after the onset of a house price bust, compared with a 1.25 percent decline after stock price busts. See IMF (2003, 2008), Claessens et al. (2008), Dekten and Smets (2004), Mishkin (2008), Borgy et al. (2009).

See Kaminsky et al. (1998) and Kaminsky and Reinhart (1999), Borgy et al. (2009), Kannan et al. (2009).

Alessi, L., & Detken, C. (2011). Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity’. European Journal of Political Economy, 27(3), 520–533.CrossRef

Borgy, V., Clerc, V., & Renne, J-P. (2009). Asset-price boom-bust cycles and credit: What is the scope of macro-prudential regulation? (Banque de France working paper No. 263).

Cecchetti, S. G. (2006). Measuring the macroeconomic risks posed by asset price booms (NBER working paper 12542). Cambridge, MA: National Bureau of Economic Research.

Cecchetti, S., & Kharroubi, E. (2012). Reassessing the impact of finance on growth (BIS working paper No. 381).

Detken, C., & Smets, F. (2004). Asset price booms and monetary policy (ECB working paper series WP No. 364). Frankfurt: European Central Bank.

Fatas, A., Kannan, P., Rabanal, P., & Scott, A. (2009, October). Lessons from asset price fluctuations for monetary policy. World Economic Outlook.

IMF World Economic Outlook. (2003, April). Growth and institutions. https://www.imf.org/external/pubs/ft/weo/2003/01/

IMF World Economic Outlook. (2008, April). Housing and the business cycle. https://www.imf.org/external/pubs/ft/weo/2008/01/

Kaminsky, G., Lizondo, S., & Reinhart, C. (1998). Leading indicators of currency crisis. IMF Staff Papers. IMF Quarterly Journal, 45, 1–48.

Kannan, P., Rabanal, P., & Scott, A. (2009). Macroeconomic patterns and monetary policy in the run-up to asset price busts (Working paper WP/09/252). Washington, DC: International Monetary Fund.

Kim, S., & Yang, D. Y. (2009). Do capital inflows matter to asset prices? The case of Korea. Asian Economic Journal East Asian Economic Association, 23(3), 323–348. 09.

Mishkin, F. S. (2008, October). How should we respond to asset price bubbles? Banque de France, Financial Stability Review, 12, Valuation and financial stability.

Xiong, W. (2013). Bubbles, crises, and heterogeneous beliefs. In J.-P. Fouque & J. Langsam (Eds.), Handbook for systemic risk. Cambridge: Cambridge University Press.

Yavas, A. (2013). Asset price bubbles and monetary policy (Hong Kong Institute for Monetary research working paper No. 102013).

Title: Stock Price Returns, Volatility and Costly Asset Price Boom–Bust Episodes
Authors: Nombulelo Gumata
Eliphas Ndou
Publisher: Springer International Publishing
Book: Bank Credit Extension and Real Economic Activity in South Africa
Print ISBN: 978-3-319-43550-3

Electronic ISBN: 978-3-319-43551-0

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-43551-0_7