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	Expectations of Fundamentals and Stock Market Puzzles

Martedì

03.03

Room 408, Università della Svizzera italiana, Campus Lugano

12:15


	Nicola Gennaioli Full professor of Finance, Bocconi University

We revisit leading puzzles about the aggregate stock market by incorporating into a standard present value framework the survey expectations of earnings for S&P 500 firms. Taking survey expectations into account, while keeping discount rates constant, explains a significant part of: i) “excess” stock price volatility, ii) price-earnings ratio variation, and iii) return predictability. These results are consistent with a mechanism in which good news about fundamentals lead to excessively optimistic forecasts earnings, in particular long-term forecasts, which inflates stock prices and leads to subsequent low returns. Relaxing rational expectations of fundamentals in a standard asset pricing model helps account for stock market anomalies in a parsimonious way.