"Superstitious" Investors *

71 Pages Posted: 4 Oct 2018 Last revised: 29 May 2024

See all articles by Hongye Guo

Hongye Guo

The University of Hong Kong - University of Hong Kong

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

Date Written: March 3, 2024


We reconsider the Shiller (1981) volatility puzzle through the lens of a model in which agents believe they can predict dividend growth when in fact they cannot. Besides excess volatility in the time series, the model explains the value premium, and the explanatory power of the value factor. In support of the model, we show that analysts' earnings forecasts align with market valuation and that analysts are far more optimistic about growth stocks than value stocks. Using both survey and price data, we show that the same mechanism can explain the excess returns earned by investing in high-interest rate currencies.

Keywords: Excess volatility, Extrapolative expectations, Rare events, Overconfidence, Carry trade JEL codes: G12, G15, G41

JEL Classification: G12, G15, G41

Suggested Citation

Guo, Hongye and Wachter, Jessica A., "Superstitious" Investors * (March 3, 2024). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3245298 or http://dx.doi.org/10.2139/ssrn.3245298

Hongye Guo

The University of Hong Kong - University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Hong Kong

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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Securities and Exchange Commission ( email )

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