X-CAPM: An Extrapolative Capital Asset Model

OMI Seminar Series

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 stock market returns by extrapolating past returns, while other investors have fully rational beliefs. We find that the model captures many features of actual prices and returns. Importantly, however, it 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.

Location:
Speaker(s):

Nick Barberis (Yale)

Date:
Tuesday, June 4, 2013 - 12:30
to 13:30