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Matthijs Breugem (Collegio Carlo Alberto)

1 April 2019 @ 12:45 - 13:45


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1 April 2019
12:45 - 13:45
Event Category:
Academic Events

“Learning from Interest Rates: Implications for Stock-Market Efficiency”

We analyse how rational investors use information contained in interest rates to learn about stock-market fundamentals. For that purpose, we develop a
competitive noisy rational expectation equilibrium model in which the rate of interest is determined endogenously. We demonstrate that the interest rate
reveals information about discount rates which helps investors extract more accurate information about cash ows from the stock’s price. The strength of this
mechanism and, hence price informativeness, is increasing in the rate of interest. Consequently, a lower mean bond supply (e.g., as a result of quantitative
easing) leads to lower stock-price informativeness and, in turn, to a higher return volatility and price of risk. We discuss how scal and monetary policies,
through their impact on interest rates, affect informational efficiency and other properties of the stock market. We report robust empirical evidence supporting
our key prediction that price informativeness is positively related to the level of the interest rate.