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Stock Price Booms and Expected Capital Gains

Adam, K; Marcet, A; Beutel, J; (2017) Stock Price Booms and Expected Capital Gains. American Economic Review , 107 (8) pp. 2352-2408. 10.1257/aer.20140205. Green open access

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Abstract

Investors' subjective capital gains expectations are a key element explaining stock price fluctuations. Survey measures of these expectations display excessive optimism (pessimism) at market peaks (troughs). We formally reject the hypothesis that this is compatible with rational expectations. We then incorporate subjective price beliefs with such properties into a standard asset-pricing model with rational agents (internal rationality). The model gives rise to boom-bust cycles that temporarily delink stock prices from fundamentals and quantitatively replicates many asset-pricing moments. In particular, it matches the observed strong positive correlation between the price dividend ratio and survey return expectations, which cannot be matched by rational expectations.

Type: Article
Title: Stock Price Booms and Expected Capital Gains
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/aer.20140205
Publisher version: http://doi.org/10.1257/aer.20140205
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10069199
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