'Superstitious' Investors

64 Pages Posted: 4 Oct 2018 Last revised: 18 Jul 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: July 17, 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 (July 17, 2019). Available at SSRN: https://ssrn.com/abstract=3245298 or http://dx.doi.org/10.2139/ssrn.3245298

Hongye Guo

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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