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Beliefs and Stock Market Fluctuations: New Evidence from the Past Seven Decades

Author

Listed:
  • David Thesmar
  • Emil Verner

Abstract

We construct a new long-run series of subjective expected equity returns from an independent equity analysis firm, spanning 1956-2024. These expected returns are strongly positively correlated with the earnings-price ratio, respond negatively to past returns, and predict future returns. These patterns contrast with subjective expectations of individual investors and professional forecasters, which are weakly or negatively correlated with our new measure. Disagreement between sophisticated and individual investors is associated with higher trading volume. Our findings are consistent with a model of heterogeneous beliefs, where naive investors extrapolate past returns, rather than past dividends, while sophisticated investors are close to rational.

Suggested Citation

  • David Thesmar & Emil Verner, 2026. "Beliefs and Stock Market Fluctuations: New Evidence from the Past Seven Decades," NBER Working Papers 35286, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35286
    Note: AP CF
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G40 - Financial Economics - - Behavioral Finance - - - General

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