As part of the series of the „Finance Research Seminar“, VGSF welcomes Scott Cederburg from University of Arizona, Eller College of Management to present his research paper.
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Paper
The Stock Market’s Two Truths: Subjective Beliefs and Objective Reality
Investor beliefs determine stock prices, yet surveys provide incomplete measures of these expectations. We develop a return-based framework that infers the representative investor’s subjective beliefs from the dynamics of objective cash-flow and discount rate news components of market returns, with minimal reliance on surveys. Importantly, our framework identifies which features of a subjective belief model are necessary to fit the data. We find investors substantially underreact to fundamental news, initially incorporating only 30% of an objective cash-flow shock. A belief model that focuses on underreaction but assumes constant subjective expected returns will fit poorly; volatile, acyclical subjective expected returns are necessary.
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