American Economic Review Vol. 107 No. 8 2017

Stock Price Booms and Expected Capital Gains

Klaus Adam¹; Albert Marcet²; Johannes Beutel³

¹ Department of Economics, University of Mannheim, L7, 3-5, 68131 Mannheim, Germany, and CEPR (email: ) · ² Institut d'Anàlisi Econòmica (CSIC), Universitat Autònoma de Barcelona, Campus Bellaterra, 08193 Barcelona, Spain, and ICREA, MOVE, Barcelona GSE, and CEPR (email: ) · ³ Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany (email: )

Abstract

Investors' subjective capital gains expectations are a key element explaining stock price fluctuations. Survey measures of these expectations display excessive optimism (pessimism) at market peaks (troughs). We formally reject the hypothesis that this is compatible with rational expectations. We then incorporate subjective price beliefs with such properties into a standard asset-pricing model with rational agents (internal rationality). The model gives rise to boom-bust cycles that temporarily delink stock prices from fundamentals and quantitatively replicates many asset-pricing moments. In particular, it matches the observed strong positive correlation between the price dividend ratio and survey return expectations, which cannot be matched by rational expectations.

DOI

10.1257/aer.20140205

Volume

107

Issue

8

Pages

2352-2408

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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