Assistant Professor of Finance
Peter Kelly joined the University of Notre Dame as an assistant professor of finance in 2015. Prior to that, he was a PhD student at Yale University. His undergraduate degree is in honors mathematics and economics from the University of Notre Dame. He teaches undergraduate and graduate courses in behavioral finance. Professor Kelly's research focuses on empirical issues in behavioral finance, especially as it relates to investments. He has published his work in the Review of Financial Studies. His research was recently covered in major media outlets like Bloomberg and the U.S. News and World Report. He has presented his research at top conferences like the American Finance Association and the American Economics Association.
“Horizon Bias and the Term Structure of Equity Returns” with Stefano Cassella, Benjamin Golez, and Huseyin Gulen, Working paper 2019. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328970
Ample evidence suggests that individuals are overly optimistic about future outcomes. In this paper, we rely on insights from psychology and economics to cast the novel prediction that optimism grows with the forecast horizon. We provide empirical evidence that professional forecasters and individuals exhibit horizon bias for forecasts of a wide variety of macroeconomic variables, in the United States and abroad. We then assess the extent to which horizon bias can help us rationalize the puzzling empirical facts regarding the term structure of equity returns. We start with a simple present value model, which predicts that horizon bias in investors’ beliefs about future cash flows is negatively related to the realized equity term premium. Using analysts’ earnings forecasts, we confirm that, like forecasts of other macroeconomic variables, beliefs about long-term growth are unconditionally more optimistic than beliefs about short-term growth. As the model predicted, we also find that regimes of above-average horizon bias are associated with negative term premia, whereas regimes of low horizon bias are associated with positive term premia. Motivated by theories of belief formation, we additionally show that the effects of horizon bias are amplified in regimes of highly extrapolative beliefs, and that the interaction between horizon bias and extrapolative beliefs generates strong and robust forecasts of next period’s realized equity term premium.