Asset Prices When Investors Underestimate Discount Rate Dynamics
Abstract Underestimating discount rate volatility leads to asset pricing anomalies. Using analysts’ return forecasts as proxies for subjective discount rates, I show that these forecasts exhibit systematically lower volatility than CAPM-based benchmarks, whose objective fluctuations negatively predict future returns, especially for high beta-volatility stocks. A misvaluation measure based on this underestimation significantly predicts cross-sectional CAPM alphas, while a tradable factor explains 12 prominent anomalies. These findings underscore discount rate volatility underestimation as a unifying explanation for analysts’ forecast errors and cross-sectional return predictability, linking recent evidence on aggregate subjective belief dynamics with firm-level mispricing.
- DOI
- 10.1093/rapstu/raag005
- Language
- en
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- openalex crossref