Working Paper: NBER ID: w25603
Authors: Hongye Guo; Jessica A. Wachter
Abstract: We consider an economy in which investors believe dividend growth is predictable, when in reality it is not. We show that these beliefs lead to excess volatility and return predictability. We also show that these beliefs are rational in the face of evidence on dividend growth. We apply this framework to explaining the value premium, predictability of bond returns, and the violation of uncovered interest rate parity.
Keywords: No keywords provided
JEL Codes: G02; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investors' belief in the predictability of dividend growth (G35) | excess volatility in stock prices (G17) |
| incorrect beliefs about dividend growth (G35) | stock prices being excessively volatile (G17) |
| incorrect beliefs about dividend growth (G35) | prices revert to true values (D46) |
| anticipated growth fails to materialize (O49) | excess returns that vary over time (G11) |
| superstitious beliefs about dividend growth (G35) | observed market phenomena (D40) |
| investor beliefs (G41) | various asset pricing anomalies (G19) |