'Superstitious' Investors

63 Pages Posted: 4 Oct 2018 Last revised: 6 Sep 2019

See all articles by Hongye Guo

Hongye Guo

University of Pennsylvania

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: September 6, 2019

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.

Keywords: Excess volatility, Extrapolative expectations, Rare events, Overconfidence

JEL Classification: G12, G15, G41

Suggested Citation

Guo, Hongye and Wachter, Jessica A., 'Superstitious' Investors (September 6, 2019). Available at SSRN: https://ssrn.com/abstract=3245298 or http://dx.doi.org/10.2139/ssrn.3245298

Hongye Guo

University of Pennsylvania ( email )

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

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