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Stock price booms and expected capital gains

AuthorsAdam, Klaus; Marcet, Albert CSIC ORCID ; Beutel, Johannes
Issue Date2-Mar-2017
CitationEconomics Emory Seminars (2017)
AbstractThe booms and busts in U.S. stock prices over the post-war period can to a large extent be explained by áuctuations in investorsí subjective capital gains expectations. As we show, survey measures of these expectations display excessive optimism at market peaks and excessive pessimism at market troughs. Using the framework of Internal Rationality of Adam and Marcet (2011), we incorporate subjective price beliefs into an otherwise standard asset pricing model with utility maximizing investors. We show how subjective belief dynamics can temporarily delink stock prices from their fundamental value and give rise to asset price booms that ultimately result in a price bust. The model quantitatively replicates (1) the volatility of stock prices and (2) the positive correlation between the price dividend ratio and expected returns observed in survey data. Models imposing objective or ërationalíprice expectations cannot simultaneously account for both facts. Our Öndings imply that large parts of U.S. stock price áuctuations are not due to standard fundamental forces, instead result from self-reinforcing belief dynamics triggered by these fundamentals.
DescriptionTrabajo presentado en el Economics Emory Seminars, organizado por el Departamento de Económicas del Emory College of Arts & Sciences (Atlanta), celebrado el 2 de marzo de 2017
Appears in Collections:(IAE) Comunicaciones congresos

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