Contrarians, Extrapolators, and Stock Market Momentum and Reversal

49 Pages Posted: 7 Dec 2020 Last revised: 11 Feb 2022

See all articles by Adem Atmaz

Adem Atmaz

Purdue University - Krannert School of Management

Stefano Cassella

Tilburg University- School of Economics and Management

Huseyin Gulen

Purdue University - Krannert School of Management

Fangcheng Ruan

Purdue University - Krannert School of Management

Date Written: February 10, 2022

Abstract

We document considerable cross-sectional variation in survey expectations about aggregate stock market returns. While most investors are extrapolators who expect higher returns after a good performance, some are contrarians. More notably, compared to extrapolators, contrarians have less persistent expectations that are corrected more quickly. Accordingly, we develop a dynamic equilibrium model accounting for these differences and find that the equilibrium stock price exhibits short-term momentum and long-term reversal as in the data. We also test key predictions of the model that link short-term momentum to differences among extrapolators and contrarians and find supportive evidence for our mechanism.

Keywords: Extrapolative expectations, extrapolators, autocorrelation, momentum, reversal

JEL Classification: G11, G12

Suggested Citation

Atmaz, Adem and Cassella, Stefano and Gulen, Huseyin and Ruan, Fangcheng, Contrarians, Extrapolators, and Stock Market Momentum and Reversal (February 10, 2022). Available at SSRN: https://ssrn.com/abstract=3722540 or http://dx.doi.org/10.2139/ssrn.3722540

Adem Atmaz (Contact Author)

Purdue University - Krannert School of Management ( email )

403 West State Street
West Lafayette, IN 47907
United States

HOME PAGE: http://www.aatmaz.com

Stefano Cassella

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Fangcheng Ruan

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://sites.google.com/view/ruanfangcheng/home

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