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Subjective Beliefs, Monetary Policy, and Stock Price Volatility

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  • Katsuhiro Oshima

    (Graduate School of Economics, Kyoto University)

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.

Suggested Citation

  • Katsuhiro Oshima, 2019. "Subjective Beliefs, Monetary Policy, and Stock Price Volatility," KIER Working Papers 1012, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:1012
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    References listed on IDEAS

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    Cited by:

    1. Katsuhiro Oshima, 2021. "Heterogeneous beliefs, monetary policy, and stock price volatility," Annals of Finance, Springer, vol. 17(1), pages 79-125, March.
    2. Katsuhiro Oshima, 2019. "Heterogeneous Beliefs, Monetary Policy, and Stock Price Volatility," KIER Working Papers 1013, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    stock price; asset pricing; subjective belief; sticky prices; New Keynesian;
    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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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