This paper takes a new approach to examine whether investors extrapolate from past returns to form expectations about future stock returns. Unlike prior research that relies on experiments or surveys to derive investors' expectations, we estimate expected returns directly from stock prices, the...

Kothari, Lewellen and Warner (2006) document that in the U.S. market aggregate earnings changes are negatively related to contemporaneous market returns. This is puzzling given the well-documented evidence that firm-level earnings changes are positively related to stock returns. In this study we...