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
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Knowledge @ Wharton - 2025/03/11