Irrational Analysts' Expectations as a Cause of Excess Volatility in Stock Prices
AbstractThis paper investigates whether excess stock price volatility may be due in part to a failure of the market to form rational expectations. Using data on analysts' expectations of long run earnings growth for individual companies, the authors report a number of interrelated results which lend support to this hypothesis. These results together imply that the cross-section of stock prices will also be excessively dispersed, so that stocks with low earnings expectations are underpriced and stocks with high earnings expectations are overpriced. As analysts' forecasts errors become apparent, stock prices adjust accordingly and so excess returns accrue. Copyright 1997 by Royal Economic Society.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 107 (1997)
Issue (Month): 441 (March)
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Other versions of this item:
- Bulkley, George & Harris, Richard, 1996. "Irrational Analysts' Expectations as a Cause of Excess Volatility in Stock Prices," Discussion Papers 9608, Exeter University, Department of Economics.
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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- Martin Wallmeier, 2005. "Analysts’ Earnings Forecasts for DAX100 Firms During the Stock Market Boom of the 1990s," Financial Markets and Portfolio Management, Springer, vol. 19(2), pages 131-151, August.
- Gordon Burt, 1997. "Cultural Convergence in Historical Cultural Space-Time," Journal of Cultural Economics, Springer, vol. 21(4), pages 291-305, December.
- Andreas Fuster & Benjamin Hebert & David Laibson, 2011.
"Natural Expectations, Macroeconomic Dynamics, and Asset Pricing,"
NBER Working Papers
17301, National Bureau of Economic Research, Inc.
- Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 1-48 National Bureau of Economic Research, Inc.
- Andreas Fuster & Benjamin Hebert & David Laibson, 2012. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 1 - 48.
- George Buckley & Richard Holt, 2004. "Forecasting Cross-Section Stock Returns using Theoretical Prices Estimated from an Econometric Model," ESE Discussion Papers 47, Edinburgh School of Economics, University of Edinburgh.
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