Belief Overreaction and Stock Market Puzzles

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

No 27283, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct an index of long term expected earnings growth for S&P500 firms and show that it has remarkable power to jointly predict errors in these expectations and stock returns, in both the aggregate market and the cross section. The evidence supports a mechanism whereby good news cause investors to become too optimistic about earnings growth, for the market as a whole but especially for specific firms. This leads to inflated stock prices and, as beliefs are systematically disappointed, to subsequent low returns in the aggregate market and for specific firms in the cross section. Overreaction of measured long-term expectations helps resolve major asset pricing puzzles without time series or cross-sectional variation in required returns.

JEL-codes: G02 G12 G4 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-fmk and nep-ore
Note: AP
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Citations: View citations in EconPapers (1)

Published as Pedro Bordalo & Nicola Gennaioli & Rafael La Porta & Andrei Shleifer, 2024. "Belief Overreaction and Stock Market Puzzles," Journal of Political Economy, vol 132(5), pages 1450-1484.

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