Skip to main content

Equity Market Rally

Since 24th November 2011, the FTSE 100 has increased by 14.6%, the S&P 500 by 21.1%, the DAX by 30.2% and the CAC 40 by 25.1%.  Why has there been a rally in equity markets over the past four months?  There are several possibilities ranging from an improved outlook for the US economy (the equity market is usually an economic bellwether), further quantitative easing by central banks, the ECB's huge liquidity injection into the European banking system, and an easing of the severity of the European debt crisis.  

David Glasner has posted an interesting explanation for the rally over at his Blog - click here.  He basically suggests that the market rally is due to an increase in inflationary expectations, which has resulted in a fall in real interest rates and a rise in stock prices.  As a UCLA graduate, Glasner was no doubt influenced by Alchian and Kessel's famous paper entitled "The Effects of Inflation".  In this paper, Alchian and Kessel discuss how inflation affects real interest rates, bond prices, and the price of real assets as well as how inflation redistributes wealth from net monetary creditors to net monetary debtors. 

 

Popular posts from this blog

How Valuable Are Connections?

Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton have written a paper on whether firms connected to Timothy Geithner benefited from these connections. They do so by looking at how stocks of these firms reacted to the announcement that he was a nominee for Treasury Secretary in November 2008. They find that there were large abnormal returns for connected firms. Below is the paper's abstract and the full paper is available here . The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner's confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small ne

Bitcoin Bubble?

According to Robert Shiller , speaking at Davos, Bitcoin is a perfect example of a bubble - story here . Shiller sees Bitcoin as a backwards step in the evolution of money.   George Selgin , a free banker, takes an opposing view - click here .  Although he doesn't believe that Bitcoin is money, he sees its development as a fascinating turn in the evolution of money. In particular, he lauds the fact that Bitcoin production is constrained and cannot be infinite. There is a short video below where Bitcoin explain how it works.

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .