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Extrapolative Beliefs in the Cross-Section: What Can We Learn from the Crowds?

  • 2019.06.28
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Speaker: Prof. Zhi Da (University of Notre Dame)

Topic:

  Extrapolative Beliefs in the Cross-Section: What Can We Learn from the Crowds?

 

Time&Date: 

  10:00-12:00 pm, 2019/7/9 (Tuesday)

Venue:

  Room 619, Teaching A

Speaker:

Prof. Zhi Da (University of Notre Dame)

Abstract: Using novel data from a crowdsourcing platform for ranking stocks, we investigate how individuals form expectations about future stock returns in the cross-section. We find that investors extrapolate from stocks’ recent past returns, with more weight on more recent returns, especially when recent returns are negative or salient. Such extrapolative beliefs are stronger among non-professionals. Moreover, consensus rankings negatively predict future stock returns, more so among stocks with low institutional ownership and high degree of extrapolation, consistent with the asset pricing im-plications of extrapolative beliefs. A trading strategy that sorts stocks on investor beliefs generates an economically significant profit.