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

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  • Gandré, Pauline

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.

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  • Gandré, Pauline, 2020. "US stock prices and recency-biased learning in the run-up to the Global Financial Crisis and its aftermath," Journal of International Money and Finance, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:jimfin:v:104:y:2020:i:c:s0261560618304790
    DOI: 10.1016/j.jimonfin.2020.102165
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    2. Cai, Haidong & Jiang, Ying & Liu, Xiaoquan, 2022. "Investor attention, aggregate limit-hits, and stock returns," International Review of Financial Analysis, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    Asset Prices; Booms and Busts; Learning; Recency Bias; Survey data;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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