Survey Forecasts, Sentiment, and Stock Market Volatility

This paper documents new evidence that survey forecasts of stock prices are not anchored by forecasts of economic fundamentals in US stock markets. This evidence is at odds with a wide range of asset pricing models with various information assumptions. The paper develops and estimates a stock pricing model with adaptive learning and sentiment shocks, which replicates this evidence, together with a set of equity pricing facts. The model suggests that about two-thirds of the fluctuations of stock pricedividend ratios are driven by shifting investors’expectations as a consequence of the dynamic interaction between the sentiment shocks and investors' learning behavior