Beliefs and Stock Market Fluctuations: New Evidence from the Past Seven Decades

David Thesmar and Emil Verner

No 35286, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct a new long-run series of subjective expected equity returns from an independent equity analysis firm, spanning 1956-2024. These expected returns are strongly positively correlated with the earnings-price ratio, respond negatively to past returns, and predict future returns. These patterns contrast with subjective expectations of individual investors and professional forecasters, which are weakly or negatively correlated with our new measure. Disagreement between sophisticated and individual investors is associated with higher trading volume. Our findings are consistent with a model of heterogeneous beliefs, where naive investors extrapolate past returns, rather than past dividends, while sophisticated investors are close to rational.

JEL-codes: E44 E47 E7 G11 G12 G17 G40 (search for similar items in EconPapers)
Date: 2026-05
Note: AP CF
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