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Resource discovery and stock market hysteresis

This paper provides a possible explanation for stock market hysteresis following a resource discovery. The existence of a parallel stock market effect is shown, 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, it is shown 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.