Extrapolative beliefs in the cross-section: What can we learn from the crowds?

Zhi Da, Xing Huang and Lawrence J. Jin

Journal of Financial Economics, 2021, vol. 140, issue 1, 175-196

Abstract: Using novel data from a crowdsourcing platform for ranking stocks, we investigate how investors form expectations about stock returns over the next week. We find that investors extrapolate from stocks’ recent past returns, with more weight on more recent returns, especially when recent returns are negative, salient, or from a dispersed cross-section. Such extrapolative beliefs are stronger among nonprofessionals and large stocks. Moreover, consensus rankings negatively predict returns over the next week, more so among stocks with low institutional ownership and a high degree of extrapolation. A trading strategy that sorts stocks on investor beliefs generates an economically significant profit.

Keywords: Return extrapolation; Beliefs in the cross-section; Expectation formation (search for similar items in EconPapers)
JEL-codes: G02 G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:140:y:2021:i:1:p:175-196

DOI: 10.1016/j.jfineco.2020.10.003

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