Investor extrapolation and expected returns

He, Wen and Shen, Jianfeng (2010) Investor extrapolation and expected returns. Journal of Behavioral Finance, 11 3: 150-160. doi:10.1080/15427560.2010.507164

Author He, Wen
Shen, Jianfeng
Title Investor extrapolation and expected returns
Journal name Journal of Behavioral Finance   Check publisher's open access policy
ISSN 1542-7560
Publication date 2010-08-31
Sub-type Article (original research)
DOI 10.1080/15427560.2010.507164
Open Access Status Not yet assessed
Volume 11
Issue 3
Start page 150
End page 160
Total pages 11
Place of publication Cambridge, United Kingdom
Publisher Cambridge University Press
Language eng
Abstract This paper takes a new approach to examine whether investors extrapolate from past returns to form expectations about future stock returns. Unlike prior research that relies on experiments or surveys to derive investors’ expectations, we estimate expected returns directly from stock prices, the book value of equity, and analyst earnings forecasts. We find that the expected returns are positively related to both past market returns and past stock returns. However, investors’ expectations seem to be overoptimistic (overpessimistic) for stocks that had extremely high (low) returns in the previous year. Furthermore, we find that investors’ expectations about future earnings growth rates are also positively related to past growth rates. The results remain robust after we control for analyst optimism and measures of risk. Taken together, our results are consistent with the findings that investors extrapolate from past stock returns and past earnings growth rates.
Keyword Extrapolation
Representative heuristic
Investor behavior
Expected returns
Expected earnings growth rates
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Non-UQ

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
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Created: Mon, 13 Mar 2017, 13:03:01 EST by Karen Morgan on behalf of UQ Business School