Extrapolative beliefs and return predictability: Evidence from China

Huajing Zhang, Fuwei Jiang and Yumin Liu

Journal of Behavioral and Experimental Finance, 2024, vol. 43, issue C

Abstract: We explore the role of extrapolative beliefs in return predictability in the Chinese stock market. Extrapolation-based theories suggest that the return predictability arises from the eventual correction of mispricing caused by extrapolators, particularly during periods of high extrapolative beliefs. Our findings support this notion, indicating that greater extrapolative beliefs strengthen the return predictability of valuation ratios. Mechanism analyses reveal that extrapolative beliefs influence the mean-reversion and investor sentiment.

Keywords: Extrapolative beliefs; Stock return predictability; Asset pricing (search for similar items in EconPapers)
JEL-codes: C53 G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:43:y:2024:i:c:s2214635024000728

DOI: 10.1016/j.jbef.2024.100957

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