Asset markets and conventional views

AROMÍ JOSÉ DANIEL

Paris

Seminario; ISG Seminar; 2015

ISG Business School

This study evaluates the performance of stock market indices after times of extreme opinions. The underlying conjecture is that extreme opinions are associated to overreactions in the perception of wealth. These misperceptions are likely to have important macroeconomic implications. The analysis covers 34 countries from 1988 through 2013. In a novel approach, views regarding economic performance are approximated using content in the global economic press. Consistent with the overreaction conjecture, stock market indices are shown to under-perform following extreme optimistic views and over-perform after pessimistic views. A long-short contrarian portfolio earns 11% annually over the next five years. This persistent and predictable difference in returns cannot be explained by risk considerations and cannot be replicated using alternative strategies based on past returns or past economic growth.