nep-fmk New Economics Papers
on Financial Markets
Issue of 2013‒07‒05
one paper chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. X-CAPM: An Extrapolative Capital Asset Pricing Model By Nicholas Barberis; Robin Greenwood; Lawrence Jin; Andrei Shleifer

  1. By: Nicholas Barberis; Robin Greenwood; Lawrence Jin; Andrei Shleifer
    Abstract: Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns: they expect the stock market to perform well (poorly) in the near future if it performed well (poorly) in the recent past. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns, but is also consistent with the survey evidence on investor expectations. This suggests that the survey evidence does not need to be seen as an inconvenient obstacle to understanding the stock market; on the contrary, it is consistent with the facts about prices and returns, and may be the key to understanding them.
    JEL: G12
    Date: 2013–06
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:19189&r=fmk

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