Horizon Bias in Expectations Formation

Cassella, Stefano; Golez, Benjamin; Gulen, Huseyin; Kelly, Peter

doi:10.2139/ssrn.3759035

Cited by 4 publications

(5 citation statements)

References 96 publications

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“…It is important to emphasize that the behavioral explanation from La Porta (1996) and Bordalo et al (2019) cannot explain the finding that alphas decrease in the maturity of the cash flows. This would require a theory of maturityrather firm-dependent expectations errors, such as that proposed by Cassella et al (2021). As shown in Table IX, Panel D, we do not find significant evidence that investors make horizon-dependent forecast errors in this sample.…”

Section: B Alternative Drivers Of the Duration Factorcontrasting

confidence: 50%

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Duration‐Driven Returns

Gormsen

Lazarus²

2023

The Journal of Finance

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We propose a duration-based explanation for the premia on major equity factors, including value, profitability, investment, low-risk, and payout factors. These factors invest in firms that earn most of their cash flows in the near future and could therefore be driven by a premium on near-future cash flows. We test this hypothesis using a novel data set of single-stock dividend futures, which are claims on dividends of individual firms. Consistent with our hypothesis, the expected Capital Asset Pricing Model alpha on individual cash flows decreases in maturity within a firm, and the alpha is not related to the above characteristics when controlling for maturity.IN THIS PAPER, WE PROVIDE a simple framework for understanding the major equity risk factors in asset pricing. We focus our analysis on value, profit, investment, low-risk, and payout factors. These five categories of risk factors have a large impact on stock prices given their high persistence, and they form the basis of leading factor models such as the Fama and French models. 1 Yet, the economics behind these factors are not well understood because the factors are hard to relate to common economic fundamentals. We relate the risk factors back to economic fundamentals, and identify the source of their high

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Section: B Alternative Drivers Of the Duration Factorcontrasting

confidence: 50%

“…This would require a theory of maturity‐ rather firm‐dependent expectations errors, such as that proposed by Cassella et al. (2021). As shown in Table IX, Panel D, we do not find significant evidence that investors make horizon‐dependent forecast errors in this sample.…”

Section: Economic Mechanismsmentioning

confidence: 99%

Duration‐Driven Returns

Gormsen

Lazarus²

2023

The Journal of Finance

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“…In addition, we have implicitly assumed that rational forecasts would generate the same growth rate for short-term and long-term forecasts. In their theoretical analysis, Cassella et al (2021) predict when the horizon bias should be stronger. Specifically, their analysis suggests that horizon bias should be higher when forecasts of long-term skewness and uncertainty are high relative to forecasts of Error is the residual from the regression of the difference between the price-to-dividend ratios for the market and the strip on the horizon bias.…”

Section: The Term Structure Of Equity and Motivated Beliefsmentioning

confidence: 99%

“…An optimism bias in financial markets would suggest that investors expect firm growth rates to be higher than they will be, on average. In recent work, Cassella et al (2021) explore how the optimism bias changes with the forecasting horizon. They find that the term-structure of optimism has significant time-series variation and is, on average, upward sloping (horizon bias).…”

mentioning

confidence: 99%

“…The beliefs of sell-side analysts may not reflect the beliefs of the investor population. Theoretical work from Cassella et al (2021), which builds on motivated belief frameworks from Brunnermeier and Parker (2005) and Caplin and Leahy (2019), suggests that the horizon bias should be stronger when long-term skewness and uncertainty about the distant future are high relative to shortterm skewness and uncertainty, respectively. As skewness increases, the true expected (nonanticipatory) utility cost of holding optimistic beliefs decreases.…”

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confidence: 99%

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Horizon Bias and the Term Structure of Equity Returns

Cassella

Golez

Gulen

et al. 2022

The Review of Financial Studies

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We label the degree to which individuals are more optimistic at long horizons relative to short horizons as the horizon bias. We examine whether time-series variation in the horizon bias can explain the time-series variation in the equity term structure. We use analyst earnings forecasts to measure the degree of the horizon bias in the stock market. Consistent with the intuition from a stylized present value model, we find that periods of above-average horizon bias are associated with negative term premiums, whereas periods of below-average horizon bias are associated with positive term premiums.

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Optimism Bias in Bidding: Contractors’ Horizontally Biased Estimating Behavior

Kim

Skibniewski

2023

J. Leg. Aff. Dispute Resolut. Eng. Constr.

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Horizon Bias in Expectations Formation

Cited by 4 publications

References 96 publications

Duration‐Driven Returns

Duration‐Driven Returns

Horizon Bias and the Term Structure of Equity Returns

Optimism Bias in Bidding: Contractors’ Horizontally Biased Estimating Behavior

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