Equity market overreaction

The equity market overreacts, both on the upside and on the downside, to the fundamentals of the real economy. This may be linked to: An overreaction in expectations of future earnings; (1) Excess liquidity, which amplifies equity buying and selling flows; Fluctuations in real long-term interest rates. An analysis of past developments leads to the conclusion that the second and third mechanisms have been present . Today, abundant liquidity seems to be the primary mechanism behind the recovery in share prices since mid-May 2020. See, for example: P. Bordalo , N. Gennaoili , R. La Porta, A. Schleifer (2020) “Expectations of Fundamentals and Stock Market Puzzles” NBER Working Paper no. 27283, May