Why People Disagree About What Drives Stock Prices

Andy Atkeson, Jonathan Heathcote and Fabrizio Perri

No 21233, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that, to a first-order approximation, estimates of fluctuations in Shiller’s fundamental price relative to observed price depend primarily on forecasts of long-horizon expected returns. Researchers using different measures of cash flow and valuation may reach different conclusions about the extent to which values fluctuate excessively relative to fundamentals, but that is only because return forecasts based on different cash-flow-to-value measures will be different. Using U.S. equity data, we demonstrate that the amount of persistence in expected returns, rather than the amount of short-run return predictability, is the key determinant of implied excess volatility. Disagreements about stock market valuation therefore reduce to disagreements about long-run expected returns.

Date: 2026-02
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