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Which Subjective Expectations Explain Asset Prices?
Resource type
Authors/contributors
- De la O, Ricardo (Author)
- Myers, Sean (Author)
Title
Which Subjective Expectations Explain Asset Prices?
Abstract
We present a method for determining whether errors in expectations explain asset pricing puzzles without imposing assumptions about the error mechanism. Using accounting identities and survey forecasts, we find that errors in expected long-term inflation explain price variation, return predictability, and the rejection of the expectations hypothesis for aggregate stock and bond markets. Errors in short-term (long-term) nominal earnings growth expectations explain (do not explain) stock price variation and return predictability. The relevant errors are consistent with mistakes about the persistence of forecasted variables and the response to surprises. A simple framework based on fundamental extrapolation successfully replicates these findings. (JEL G40, G12, G14, E71)
Publication
The Review of Financial Studies
Volume
37
Issue
6
Pages
1929-1978
Date
2024-06-01
Journal Abbr
The Review of Financial Studies
ISSN
0893-9454
Accessed
6/16/24, 9:48 PM
Library Catalog
Silverchair
Citation
De la O, R., & Myers, S. (2024). Which Subjective Expectations Explain Asset Prices? The Review of Financial Studies, 37, 1929–1978.
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