Earnings Extrapolation And Predictable Stock Market Returns

83 Pages Posted: 13 Nov 2019 Last revised: 3 Apr 2025

See all articles by Hongye Guo

Hongye Guo

The University of Hong Kong - University of Hong Kong

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

Guo, Hongye, Earnings Extrapolation And Predictable Stock Market Returns (November 16, 2019). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, The Review of Financial Studies, 2025[10.1093/rfs/hhaf020], Available at SSRN: https://ssrn.com/abstract=3480863 or http://dx.doi.org/10.1093/rfs/hhaf020

Hongye Guo (Contact Author)

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

Pokfulam Road
Hong Kong, Hong Kong
China

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