IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v164y2025ics0304405x24002095.html
   My bibliography  Save this article

Extracting extrapolative beliefs from market prices: An augmented present-value approach

Author

Listed:
  • Cassella, Stefano
  • Chen, Te-Feng
  • Gulen, Huseyin
  • Liu, Yan

Abstract

We propose a latent-variables approach to recover extrapolative beliefs from asset prices. We estimate a present-value model of the price–dividend ratio of the market that embeds both return extrapolation and cash-flow extrapolation, alongside discount rates and rational expectations of dividend growth. This approach allows us to measure extrapolation bias without having to rely on survey data, and it inherently guarantees that the researcher focuses on a set of beliefs that matter for price formation. We show that extrapolative beliefs extracted from prices are highly correlated with surveys and that survey-based and price-based extrapolative beliefs share similar predictive properties for future returns, with the former improving upon the latter.

Suggested Citation

  • Cassella, Stefano & Chen, Te-Feng & Gulen, Huseyin & Liu, Yan, 2025. "Extracting extrapolative beliefs from market prices: An augmented present-value approach," Journal of Financial Economics, Elsevier, vol. 164(C).
    • Handle: RePEc:eee:jfinec:v:164:y:2025:i:c:s0304405x24002095
    DOI: 10.1016/j.jfineco.2024.103986
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X24002095
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2024.103986?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:164:y:2025:i:c:s0304405x24002095. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.