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Extrapolative beliefs and return predictability: Evidence from China

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  • Zhang, Huajing
  • Jiang, Fuwei
  • Liu, Yumin

Abstract

We explore the role of extrapolative beliefs in return predictability in the Chinese stock market. Extrapolation-based theories suggest that the return predictability arises from the eventual correction of mispricing caused by extrapolators, particularly during periods of high extrapolative beliefs. Our findings support this notion, indicating that greater extrapolative beliefs strengthen the return predictability of valuation ratios. Mechanism analyses reveal that extrapolative beliefs influence the mean-reversion and investor sentiment.

Suggested Citation

  • Zhang, Huajing & Jiang, Fuwei & Liu, Yumin, 2024. "Extrapolative beliefs and return predictability: Evidence from China," Journal of Behavioral and Experimental Finance, Elsevier, vol. 43(C).
    • Handle: RePEc:eee:beexfi:v:43:y:2024:i:c:s2214635024000728
    DOI: 10.1016/j.jbef.2024.100957
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    More about this item

    Keywords

    Extrapolative beliefs; Stock return predictability; Asset pricing;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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