The Cross-section of Subjective Expectations: Understanding Prices and Anomalies

77 Pages Posted: 22 Nov 2022 Last revised: 6 Feb 2024

See all articles by Ricardo De la O

Ricardo De la O

University of Southern California - Marshall School of Business

Xiao Han

City University London - Bayes Business School

Sean Myers

The Wharton School, University of Pennsylvania

Date Written: Jan 2024

Abstract

Cross-sectional decompositions using professional forecasts show high price-earnings ratios are accounted for by both low expected returns and overly high expected earnings growth. The magnitudes and timing of the comovements between prices, earnings growth, and returns are consistent with gradual learning rather than expectations being highly sensitive to recent realizations. Earnings growth surprises do not translate 1-1 into one-period returns, but instead are gradually reflected in returns over time. A structural model incorporating constant-gain learning about mean earnings growth, coupled with risk premia linked to cash flow timing, replicates our findings and generates realistic dispersion and persistence in price-earnings ratios.

Keywords: subjective expectation, price dispersion, learning, mispricing, revisions

Suggested Citation

De la O, Ricardo and Han, Xiao and Myers, Sean, The Cross-section of Subjective Expectations: Understanding Prices and Anomalies (Jan 2024). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , USC Marshall School of Business Research Paper Sponsored by iORB, No. Forthcoming, Available at SSRN: https://ssrn.com/abstract=4279862 or http://dx.doi.org/10.2139/ssrn.4279862

Ricardo De la O

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 803
Los Angeles, CA California 90089-1424
United States

Xiao Han (Contact Author)

City University London - Bayes Business School ( email )

United Kingdom

Sean Myers

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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