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Heterogeneous Beliefs, Monetary Policy, and Stock Price Volatility

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

No 1013, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper investigates how the stance of monetary policy affects stock price volatilities in an economy where two types of households with subjective and objective beliefs about expected capital gains from stock prices exist. I assume that investors construct subjective beliefs about expected capital gains by Bayesian learning from observed growth rates of stock prices. In a model with only homogenous subjective beliefs, the effect of the interest rate on stock prices tends to be unrealistically strong. In contrast, assuming heterogeneity by including investors with both subjective and objective beliefs improves the fit of theoretical moments to the data and especially helps to explain stock price volatility under interest rate shocks with conventional sizes. This quantitative improvement in stock price reactions to interest rate shocks allows me to conduct realistic analysis about how the stance of monetary policy affects stock price volatilities. Strong inertia of monetary policy rule does not necessarily reduce asset price volatilities. This depends on what kind of shock the economy is experiencing. When the monetary policy is persistent, stock price volatilities magnify under an unexpected monetary policy shock

Keywords: stock price; asset pricing; heterogeneity; subjective belief; monetary policy; 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: 38pages
Date: 2019-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:1013

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