Interpreting Equity Price Movements Since the Start of the Financial Crisis

10 Pages Posted: 25 Mar 2010

Date Written: March 15, 2010

Abstract

Equity markets have experienced large price movements since the financial crisis began in mid-2007. Understanding the factors that drive equity prices is important for policymakers as they may contain information about the future course of the economy. This article uses a simple model to decompose recent equity price movements into changes in earnings expectations, the risk-free rate and the equity risk premium. Indicative evidence suggests that changes in earnings expectations can account for some, but by no means all, of the shifts in equity prices since mid-2007. Policy actions by central banks and governments are likely to have supported equity prices, for example by lowering government bond yields and reducing the likelihood of more severe downside risks to the economy materialising. The latter may also have contributed to a fall in the implied level of the equity risk premium, which had increased sharply during the financial crisis.

Suggested Citation

Inkinen, Mika J. and Stringa, Marco and Voutsinou, Kyriaki, Interpreting Equity Price Movements Since the Start of the Financial Crisis (March 15, 2010). Bank of England Quarterly Bulletin, 2010 Q1, Available at SSRN: https://ssrn.com/abstract=1574285

Mika J. Inkinen (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Marco Stringa

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Kyriaki Voutsinou

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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