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"Superstitious" Investors

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  • Hongye Guo
  • Jessica A. Wachter

Abstract

We consider an economy in which investors believe dividend growth is predictable, when in reality it is not. We show that these beliefs lead to excess volatility and return predictability. We also show that these beliefs are rational in the face of evidence on dividend growth. We apply this framework to explaining the value premium, predictability of bond returns, and the violation of uncovered interest rate parity.

Suggested Citation

  • Hongye Guo & Jessica A. Wachter, 2019. ""Superstitious" Investors," NBER Working Papers 25603, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25603
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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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