Long Term Expectations and Aggregate Fluctuations

Pedro Bordalo, Nicola Gennaioli, Rafael La Porta, Matthew O'Brien and Andrei Shleifer

No 31578, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In line with Keynes’ intuition, volatility in the stock market and in real economic activity are linked by expectations of long term profits. We show that analysts’ optimism about the long term earnings growth of S&P 500 firms is associated with a near term boom in major US financial markets, real investment, and other business cycle indicators. The same optimism however predicts disappointing earnings growth and a contraction in financial markets and real activity one to two years later. Overreaction of measured long term profit expectations emerges as a promising mechanism for reconciling Shiller’s excess volatility puzzle with the business cycle.

JEL-codes: E0 E32 E44 E7 G01 G10 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-bec, nep-fdg and nep-pke
Note: ME
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Published as Long-Term Expectations and Aggregate Fluctuations , Pedro Bordalo, Nicola Gennaioli, Rafael La Porta, Matthew OBrien, Andrei Shleifer. in NBER Macroeconomics Annual 2023, volume 38 , Eichenbaum, Hurst, and Ramey. 2024

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Journal Article: Long-Term Expectations and Aggregate Fluctuations (2024)
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