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  3. American Economic Review
  4. August 2017
  5. Stock Price Booms and Expected Capital Gains

Stock Price Booms and Expected Capital Gains

  • Klaus Adam
  • Albert Marcet
  • Johannes Beutel
American Economic Review
vol. 107, no. 8, August 2017
(pp. 2352-2408)
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Abstract

Investors' subjective capital gains expectations are a key element explaining stock price fluctuations. Survey measures of these expectations display excessive optimism (pessimism) at market peaks (troughs). We formally reject the hypothesis that this is compatible with rational expectations. We then incorporate subjective price beliefs with such properties into a standard asset-pricing model with rational agents (internal rationality). The model gives rise to boom-bust cycles that temporarily delink stock prices from fundamentals and quantitatively replicates many asset-pricing moments. In particular, it matches the observed strong positive correlation between the price dividend ratio and survey return expectations, which cannot be matched by rational expectations.

Citation

Adam, Klaus, Albert Marcet, and Johannes Beutel. 2017. "Stock Price Booms and Expected Capital Gains." American Economic Review, 107 (8): 2352-2408. DOI: 10.1257/aer.20140205

Additional Materials

JEL Classification

  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • D84 Expectations; Speculations
  • G12 Asset Pricing; Trading Volume; Bond Interest Rates
  • G14 Information and Market Efficiency; Event Studies; Insider Trading