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Asset pricing with return extrapolation

Jin, Lawrence J. and Sui, Pengfei (2022) Asset pricing with return extrapolation. Journal of Financial Economics, 145 (2). pp. 273-295. ISSN 0304-405X. doi:10.1016/j.jfineco.2021.10.009.

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We present a new model of asset prices in which a representative agent has extrapolative beliefs about stock market returns and Epstein-Zin preferences. The model quantitatively explains facts about asset prices, return expectations, and cash-flow expectations. When the agent’s beliefs about stock market returns are calibrated to survey expectations of investors, the model generates excess volatility and predictability of stock market returns, a high equity premium, a low and stable risk-free rate, and a low correlation between stock market returns and consumption growth. Moreover, the model has implications for expectations about future cash flows that are consistent with empirical findings.

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Additional Information:© 2021 Elsevier. Received 21 April 2021, Revised 29 June 2021, Accepted 7 July 2021, Available online 2 December 2021, Version of Record 10 June 2022. We are grateful to David Hirshleifer (the editor), an anonymous referee, Nicholas Barberis, John Campbell, Stefano Cassella, Alexander Chinco, Ricardo De la O, Michael Ewens, Cary Frydman, Robin Greenwood, Philip Hoffman, Jonathan Ingersoll, Dana Kiku, Theresa Kuchler, Jiacui Li, Lars Lochstoer, Sean Myers, Cameron Peng, Andrei Shleifer, Jessica Wachter, Baolian Wang, Jianfeng Yu, and seminar participants at Caltech, Maastricht University, Tilburg University, the University of California, Irvine, the University of Southern California, the Young Economists Symposium at Yale, the Caltech Junior Faculty Behavioral Finance Conference, the Finance Down Under Conference, CICF, the SFS Cavalcade North America meeting, the NBER Behavioral Finance meeting, the NBER Summer Institute Asset Pricing meeting, and the American Finance Association Annual Meeting for very helpful comments.
Subject Keywords:Expectations; Extrapolation; Asset prices
Issue or Number:2
Classification Code:JEL classification: G02; G12
Record Number:CaltechAUTHORS:20211202-126363779
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Official Citation:Lawrence J. Jin, Pengfei Sui, Asset pricing with return extrapolation, Journal of Financial Economics, Volume 145, Issue 2, Part A, 2022, Pages 273-295, ISSN 0304-405X,
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:112165
Deposited By: George Porter
Deposited On:02 Dec 2021 10:37
Last Modified:16 Aug 2022 21:48

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