Download This PaperEarnings Extrapolation And Predictable Stock Market Returns
The Review of Financial Studies, 2025[10.1093/rfs/hhaf020]
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
83 Pages Posted: 13 Nov 2019 Last revised: 19 Feb 2026
Date Written: November 16, 2019
Abstract
The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative if the future month is the first month of a quarter, and positive if it isn't. These correlations offset, consistent with the well-known near-zero unconditional autocorrelation, yet they are pervasive, present across industries and countries. The pattern accords with a model in which investors extrapolate announced earnings to predict future earnings, not recognizing that earnings in the first month of a quarter are discretely less predictable than in prior months. Survey data support the model.
Keywords: Behavioral Finance, Earnings Announcements, Efficient Market Hypothesis, Extrapolative Beliefs, Stock Returns Autocorrelation
JEL Classification: G12, G14, G40
Suggested Citation: Suggested Citation