ENDOGENOUS PARTICIPATION, RISK, AND LEARNING IN THE STOCK MARKET. (6th April 2022)

• Record Type: Journal Article
• Authors: Shin, Michael
• Is Part Of: Macroeconomic dynamics. Volume 26:Number 3(2022)
• Page Start: 649
• Page End: 681
• Publication Date: 2022-04-06
• Subjects: Stock Market Participation -- Adaptive Learning -- Excess Volatility -- Asset Pricing; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100520000346
• Languages: English
• ISSNs: 1365-1005

Abstract

Abstract : A simple asset pricing model with both endogenous stock market participation and subjective risk can explain the negative cross-country correlation between participation rates and the volatility of excess returns, along with the time-varying participation rates in the data. Belief-driven learning dynamics can explain the interplay between participation rates, subjective risk, and stock price volatility. When agents adaptively learn about the risk and return, my model generates 25% of the excess volatility observed in US stock prices, while also matching key moments. With learning about risk, excess volatility of stock prices is driven by fluctuations in the participation rate that arise because agents' risk estimates vary with prices. I find that learning about risk is quantitatively more important than learning about returns.