Long Term Expectations and Aggregate Fluctuations / Pedro Bordalo, Nicola Gennaioli, Rafael La Porta, Matthew O'Brien, Andrei Shleifer.

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Bordalo, Pedro

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w31578.Publication details: Cambridge, Mass. National Bureau of Economic Research 2023.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: In line with Keynes' intuition, volatility in the stock market and in real economic activity are linked by expectations of long term profits. We show that analysts' optimism about the long term earnings growth of S&P 500 firms is associated with a near term boom in major US financial markets, real investment, and other business cycle indicators. The same optimism however predicts disappointing earnings growth and a contraction in financial markets and real activity one to two years later. Overreaction of measured long term profit expectations emerges as a promising mechanism for reconciling Shiller's excess volatility puzzle with the business cycle.

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Working Paper	Biblioteca Digital	Colección NBER	nber w31578 (Browse shelf(Opens below))	Not For Loan

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August 2023.

In line with Keynes' intuition, volatility in the stock market and in real economic activity are linked by expectations of long term profits. We show that analysts' optimism about the long term earnings growth of S&P 500 firms is associated with a near term boom in major US financial markets, real investment, and other business cycle indicators. The same optimism however predicts disappointing earnings growth and a contraction in financial markets and real activity one to two years later. Overreaction of measured long term profit expectations emerges as a promising mechanism for reconciling Shiller's excess volatility puzzle with the business cycle.