Correlated beliefs, returns, and stock market volatility
Joel David () and
Ina Simonovska ()
Journal of International Economics, 2016, vol. 99, issue S1, S58-S77
Firm-level stock returns exhibit comovement above that in fundamentals, and the gap tends to be higher in developing countries. We investigate whether correlated beliefs among sophisticated, but imperfectly informed, traders can account for the patterns of return correlations across countries. We take a unique approach by turning to direct data on market participants' information — namely, real-time firm-level earnings forecasts made by equity market analysts. The correlations of firm-level forecasts exceed those of fundamentals and are strongly related to return correlations across countries. A calibrated information-based model demonstrates that the correlation of beliefs implied by analyst forecasts leads to return correlations broadly in line with the data, both in levels and across countries — the correlation between predicted and actual is 0.63. Our findings have implications for market-wide volatility — the model-implied correlations alone can explain 44% of the cross-section of aggregate volatility. The results are robust to controlling for a number of alternative factors put forth by the existing literature.
Keywords: Volatility; Comovement; Emerging markets; Forecasting; Information frictions (search for similar items in EconPapers)
JEL-codes: G15 G12 G17 D8 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Chapter: Correlated Beliefs, Returns, and Stock Market Volatility (2016)
Working Paper: Correlated Beliefs, Returns, and Stock Market Volatility (2016)
Working Paper: Correlated Beliefs, Returns, and Stock Market Volatility (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:99:y:2016:i:s1:p:s58-s77
Access Statistics for this article
Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, AndrÃ©s
More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Haili He ().