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Irrational Analysts' Expectations as a Cause of Excess Volatility in Stock Prices

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  • Bulkley, George
  • Harris, Richard D F

Abstract

This 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 Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 107 (1997)
Issue (Month): 441 (March)
Pages: 359-71

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Handle: RePEc:ecj:econjl:v:107:y:1997:i:441:p:359-71

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Cited by:
  1. Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
  2. Green, Christopher J. & Maggioni, Paolo & Murinde, Victor, 2000. "Regulatory lessons for emerging stock markets from a century of evidence on transactions costs and share price volatility in the London Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 577-601, April.
  3. 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.
  4. 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.
  5. Gordon Burt, 1997. "Cultural Convergence in Historical Cultural Space-Time," Journal of Cultural Economics, Springer, vol. 21(4), pages 291-305, December.

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