Belief Overreaction and Stock Market Puzzles

Pedro Bordalo, Nicola Gennaioli, Rafael La Porta and Andrei Shleifer

Journal of Political Economy, 2024, vol. 132, issue 5, 1450 - 1484

Abstract: We construct an index of long-term expected earnings growth for S&P 500 firms and show that it has remarkable power to jointly predict future errors in expectations and stock returns, in both the aggregate market and the cross section. The evidence supports a mechanism whereby good news causes investors to become too optimistic about long-term earnings growth. This leads to inflated stock prices and, as beliefs are systematically disappointed, subsequent low returns in the aggregate market. Overreaction of long-term expectations helps resolve major asset-pricing puzzles without time-series or cross-sectional variation in required returns.

Date: 2024
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1086/727713 (application/pdf)
http://dx.doi.org/10.1086/727713 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
Working Paper: Belief Overreaction and Stock Market Puzzles (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:doi:10.1086/727713

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().