US stock prices and recency-biased learning in the run-up to the Global Financial Crisis and its aftermath

Pauline Gandré

Journal of International Money and Finance, 2020, vol. 104, issue C

Abstract: This paper presents a consumption-based asset pricing model in which fluctuations in stock prices are driven by investors’ time-varying subjective expectations about the dividend process. In line with the empirical literature, investors display recency bias when revising their beliefs about the actual dividend process and recursively discount the precision of past observations. Recency-biased learning significantly improves the ability of the standard model to replicate the boom-and-bust episode on the US S&P 500 stock market in the run-up to the Global Financial Crisis and its aftermath, along with features of subjective expectations of stock returns documented in survey data.

Keywords: Asset Prices; Booms and Busts; Learning; Recency Bias; Survey data (search for similar items in EconPapers)
JEL-codes: D83 D84 G12 G15 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:104:y:2020:i:c:s0261560618304790

DOI: 10.1016/j.jimonfin.2020.102165

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