A recent paper by AQR, "Why are bond investors contrarian while equity investors extrapolate," makes an interesting observation. I have always thought that bond investors were mena reverting based on their conservative nature. There are limits to where yields can go. Equity investors are optimists, which means that returns can always move higher based on unlimited possibilities. Overoptimism will lead to the extrapolation of good news. Of course, this does not explain what happens to markets when they start to move negatively. The pessimism of bond investors forms beliefs about limitations and the notion that good news cannot last.
AQR states that the cause is information salience, the attention -grabbing qualities of certain information. This, however, does not focus on why there is salience that is different across markets and why it may persist. Nonetheless, it is essential to think about differences in how expectations are formed in major asset classes.
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