Online Appendix for "Earnings Extrapolation and Predictable Stock Market Returns"

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 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 return autocorrelation

JEL Classification: G12, G14, G40