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
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)
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:1012
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