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Subjective Beliefs, Monetary Policy, and Stock Price Volatility

Katsuhiro Oshima ()
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Katsuhiro Oshima: Graduate School of Economics, Kyoto University

No 1012, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: The main purpose of this study is to understand how the stance of monetary policy affects stock price volatility in a New Keynesian model with investors who have subjective beliefs about stock price growth. I assume that investors construct subjective beliefs about expected capital gains from stock prices by Bayesian learning from observed growth rates of stock prices. I design the model so that the effects of the existence of subjective households are minimal, i.e., it affects only stock prices. I find that higher monetary policy persistence increases stock price volatilities under the interest rate shock because the subjective beliefs imply myopic pricing in which near-term pricing kernels (or real interest rates) and near-term dividends matter. This result contrasts with stock pricing under the rational expectation, in which future discounted dividends matter.

Keywords: stock price; asset pricing; subjective belief; sticky prices; New Keynesian (search for similar items in EconPapers)
JEL-codes: D83 D84 E44 E52 G12 G14 (search for similar items in EconPapers)
Pages: 37pages
Date: 2019-11
New Economics Papers: this item is included in nep-dge and nep-mac
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