Despite few economic meaning, the nominal per-share price of a stock is one of the most important references for stock market investors (e.g., Weld, Michaely, Thaler, and Benartzi; Journal of Economic Perspectives 2009). That is, investors care about where the current per-share price is and also forecast its future value. However, since the price is a convex function of return, the share price forecast is biased upwards compared to the underlying return; consequently, a lower return accrues in the future. In this paper, we find evidence for this hypothesis, namely, that the degree of this price forecast bias is negatively related to future return cross-sectionally. We also show that this result is independent of the existing cross-sectional patterns such as the size, BM, momentum, reversal, and liquidity effects. Since the price forecast bias increases in stock return volatility, our results help explain the so-called volatility puzzle in which stocks with greater volatility earns a lower return in the future.
Keywords: Stock price forecast; Convexity; Jensen’s inequality; Cross-section of stock returns; Volatility puzzle
JEL classification: G10; G11; G12
학회소식
공지사항
[2011년 제 4차] Bias in stock price forecast and the cross-section
작성자 : 관리자
조회수 : 779
게시일 :
2011-12-07