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Conventional Views and Asset Prices: What to Expect After Times of Extreme Opinions?

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  • Daniel José Aromí

    (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)

Abstract

This study evaluates the performance of stock market indices after times of extreme opinions. The underlying conjecture is that extreme opinions are associated to overreactions in the perception of wealth. The analysis covers 34 countries from 1988 through 2013. In a novel approach, views regarding economic performance are approximated using content in the global economic press. Consistent with the overreaction conjecture, stock market indices are shown to under-perform following extreme optimistic views and over-perform after pessimistic views. A longshort contrarian portfolio earns 11% annually over the next five years. This persistent and predictable difference in returns cannot be explained by risk considerations and cannot be replicated using alternative strategies based on past returns or past economic growth.

Suggested Citation

  • Daniel José Aromí, 2016. "Conventional Views and Asset Prices: What to Expect After Times of Extreme Opinions?," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2016-15, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    • Handle: RePEc:ake:iiepdt:201615
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    More about this item

    Keywords

    Asset prices; Opinions; Expectations; Overreaction;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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