Sentiment about Stock Prices

The paper develops and estimates a stock pricing model with sentiment shocks to stock price forecasts and learning about stock prices by investors which replicates several survey evidence on stock price forecasts along with a standard set of asset pricing facts for the United States. A unique feature is that stock price forecasts in the model are not anchored by (or not co-integrated with) forecasts of fundamentals as in survey data. The model suggests about two-thirds of the fluctuations of stock price-dividend ratios are driven by shifting investors’ expectations as a result of the dynamic interaction between the sentiment shocks and investors’ learning.