The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative (positive) if the future month is (is not) the first month of a quarter. These effects offset, leaving the market return with its weak unconditional predictive ability known to the literature. The pattern accords with a model in which investors extrapolate announced earnings to predict future earnings, not recognizing that earnings in the first month of a quarter are inherently less predictable than in other months. Survey data support this model, as does out-of-sample evidence across industries and international markets. These results seriously challenge the Efficient Market Hypothesis and advance a novel mechanism of expectation formation.
Hongye Guo
Contact Information
- Primary Email:
hoguo@wharton.upenn.edu - Mobile Phone:
4133625218
Research Interests: Empirical Asset Pricing, Behavioral Finance
Links: CV, Personal Website
Activity
In the News
Building Stronger Family Offices by Sharing Knowledge and Securing the FutureWharton management professor discusses the objectives and key takeaways of the Wharton Global Family Alliance’s 2024 Family Office Survey.…Read More
Knowledge @ Wharton - 2024/11/21