Abstract
Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns; importantly, however, it is also consistent with the survey evidence on investor expectations.
Highlights
Recent theoretical work on the behavior of aggregate stock market prices has tried to account for several empirical regularities
We present a new model of aggregate stock market prices which attempts to both incorporate extrapolative expectations held by a significant subset of investors, and address the evidence that other models have sought to explain
Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns: they expect the stock market to perform well in the near future if it has recently performed well
Summary
Recent theoretical work on the behavior of aggregate stock market prices has tried to account for several empirical regularities. Stock market returns using the aggregate dividend-price ratio (Campbell and Shiller, 1988; Fama and French, 1988) Both traditional and behavioral models have tried to account for this evidence. As recently summarized by Greenwood and Shleifer (2014) using data from multiple investor surveys, many investors hold extrapolative expectations, believing that stock prices will continue rising after they have previously risen, and falling after they have previously fallen.. As recently summarized by Greenwood and Shleifer (2014) using data from multiple investor surveys, many investors hold extrapolative expectations, believing that stock prices will continue rising after they have previously risen, and falling after they have previously fallen.1 As recently summarized by Greenwood and Shleifer (2014) using data from multiple investor surveys, many investors hold extrapolative expectations, believing that stock prices will continue rising after they have previously risen, and falling after they have previously fallen. This evidence is inconsistent with the
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
