Resource Discovery and Stock Market Hysteresis
12 Pages Posted: 5 Nov 2006
Date Written: January 2006
This paper provides a possible explanation for stock market hysteresis following an resource discovery. We show the existence of a parallel stock market effect independent of the standard 'Dutch disease' effect of a resource discovery. That is, there is a long run fall in the stock market value in response to the resource discovery. Furthermore, we show that a sufficiently large discovery may lead to a switch from a 'high' to a 'low' stock market value equilibrium. If the resource discovery proves subsequently to be unfounded, the economy will become stuck in the low stock market value state. In other words, there is stock market hysteresis.
Keywords: stock market, multiple equilibria, hysteresis
JEL Classification: E32, G10, Q33, Q43
Suggested Citation: Suggested Citation