A0309
Title: The everything bubble: What is behind the surge in US equity prices
Authors: Christoph Wegener - Leuphana University Lueneburg (Germany) [presenting]
Tobias Basse - Norddeutsche Landesbank Girozentrale and Touro University Berlin (Germany)
Michael Lamla - University of Duisburg-Essen (Germany)
Stefano Maiani - Heriot Watt University (United Kingdom)
Abstract: The purpose is to investigate the recent surge in United States (US) equity prices, documenting the explosive growth of the Standard \& Poor's 500 Index since 2009. Similar trends across various US equity market sectors and other US dollar-denominated assets suggest a potential widespread speculative bubble. Testing for co-explosiveness reveals a common trend between the volume of the Federal Reserve's balance sheet and US asset prices, linking monetary policy to the asset price surge. US policymakers have lowered long-term interest rates, including the risk-free rate, to artificially low levels. It is theoretically argued that a rational bubble is unlikely in such an environment. Instead, a bond market bubble, driven by the Federal Reserve's substantial purchases of fixed-income securities following the drop in short-term interest rates to nearly zero, offers a more compelling explanation for the equity price surge. This argument is supported by an empirical testing procedure against rational bubbles, which is based on expectations rather than the dividend stream. This approach accounts for anticipated interest rate levels, providing an advantage. Since the procedure does not indicate a rational bubble and explosive behavior is not inferred in dividend streams, the (artificially) low interest rates remain the most plausible explanation for the explosive equity price behavior.
