Faithin Omaha eBook Collection

Download or read book Expectations of Fundamentals and Stock Market Puzzles written by Pedro Bordalo and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We revisit several leading puzzles about the aggregate stock market by incorporating into a standard dividend discount model survey expectations of earnings of S&P 500 firms. Using survey expectations, while keeping discount rates constant, explains a significant part of "excess” stock price volatility, price-earnings ratio variation, and return predictability. The evidence is consistent with a mechanism in which good news about fundamentals leads to excessively optimistic forecasts of earnings, especially at long horizons, which inflate stock prices and lead to subsequent low returns. Relaxing rational expectations of fundamentals in a standard asset pricing model accounts for stock market anomalies in a parsimonious way.