« Back to Results
Hilton Atlanta, Grand Ballroom D
Hosted By:
American Finance Association
Mispricing
Paper Session
Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM
- Chair: Justin Birru, Ohio State University
Be Fearful When Households Are Greedy: The Household Equity Share and Expected Market Returns
Abstract
I define the “Household Equity Share” (HEShare), the share of the household sector’s equity and fixed income assets allocated to equities. HEShare negatively forecasts excess returns on the aggregate US stock market, both univariately and controlling for past changes in equity prices and common market return forecasters. The non-household sector’s equity share does not forecast returns, ruling out economy-wide explanations for HEShare’s return predictability. At times, HEShare predicts negative mean excess market returns, suggesting that behavioral factors explain the findings. Under the behavioral interpretation, the household sector’s “mistiming” of the equity market imposes meaningful portfolio costs.Climate Risks of Sales Forecasts: Evidence from Satellite Readings of Soil Moisture
Abstract
We show that recently-available satellite readings of soil moisture---developed to study the impact of climate change on hydrological cycles---predict the output of the water-intensive food industry. Using sales and forecasts data from thirty-one countries with publicly-traded food companies from 1994-2014, we obtain causal estimates by instrumenting for soil moisture with climatic measures of droughts based on temperature and precipitation. Soil moisture is particularly important for food industry sales in the last decade, a period of historically high temperatures. Consensus sales forecasts by security analysts, widely used to guide corporate investments and adaptations, have not recognized this structural change.Extrapolative Beliefs in the Cross-section: What Can We Learn from the Crowds?
Abstract
Using novel data from a crowdsourcing platform for ranking stocks, we investigate how individuals form expectations about future stock returns in the cross-section. In each contest on this platform, participants rank 10 stocks based on their perceived future performance of these stocks over the course of the contest (usually one week). We find that, when forming expectations, investors extrapolate from past returns, with more weight on more recent returns, especially when recent returns are negative. The extrapolation bias is stronger among Forcerank users who are not financial professionals. Moreover, consensus rankings negatively predict future stock returns in the cross-section, more so among stocks with low institutional ownership and a high degree of extrapolative bias, consistent with the asset pricing implications of extrapolative beliefs. This return predictability extends to large stocks that are not covered on the platform and is not driven by liquidity-shock-induced price reversals. Finally, the residual component of the consensus rankings orthogonal to past stock returns also negatively predicts future returns, suggesting that investor sentiment is above and beyond return extrapolation.Discussant(s)
Peter Kelly
,
University of Notre Dame
Dong Lou
,
London School of Economics
David Solomon
,
Boston College
Abhiroop Mukherjee
,
Hong Kong University of Science and Technology
JEL Classifications
- G1 - General Financial Markets