The Inelastic Markets Hypothesis

[Jason Ganetsky]

I found a very interesting paper about the stock market from 2021: The Inelastic Markets Hypothesis. Their hypothesis is that flows of funds determine the aggregate value of the stock market more than traditional valuation metrics.

Has anyone seen this?

If not, and you are interested in both MMT and the stock market, then this is worth a read! I'm slowly making my way through it now, as there is quite a bit of mathematics involved. Seems like this could be a stepping stone towards a grand unified theory of sectoral balances and the stock market.

Some key quotes:

We start by asking a simple question: when an investor sells $1 worth of bonds and buys $1 worth of stocks, what happens to the valuation of the aggregate stock market? In the simplest “efficient markets” model, the price is the present value of future dividends, so the valuation of the aggregate market should not change. However, we find both theoretically and empirically, using an instrumental variables strategy, that the market’s aggregate value goes up by about $5 (our estimates are between $3 and $8, and we will use $5 for simplicity in the theory and discussion). Hence, the stock market in this simple model is a very reactive economic machine.

The model also clarifies how to measure net flows into the aggregate stock market (even though for every buyer there is a seller), which guides the empirical analysis.

Thanks,

Jason