Earnings Extrapolation And Predictable Stock Market Returns

81 Pages Posted: 13 Nov 2019 Last revised: 17 Feb 2023

See all articles by Hongye Guo

Hongye Guo

University of Pennsylvania

Date Written: November 16, 2019


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 is not. These correlations offset on average, consistent with the well-known nearly zero unconditional autocorrelation, yet they are pervasive, present across industries and international markets. 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 inherently less predictable. 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, Available at SSRN: https://ssrn.com/abstract=3480863 or http://dx.doi.org/10.2139/ssrn.3480863

Hongye Guo (Contact Author)

University of Pennsylvania ( email )

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