Stock Price, Real Riskless Interest Rate and Learning

Abstract

In this paper, I first discover how real riskless interest rate, the tool for conducting monetary policy, is empirically related to stock price. Then, consumption based asset pricing model with rational expectations has been shown to fail in generating the same relationship. However, allowing a small deviation from RE by introducing learning mechanism can quantitatively account for the weak relationship between stock price and the risk-free interest rate. Therefore, I claim that this model could be favorable workhorse for studying monetary policy and asset price