NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Expectations of Returns and Expected Returns

Robin Greenwood, Andrei Shleifer

NBER Working Paper No. 18686
Issued in January 2013
NBER Program(s):   AP   CF

We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient.

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Document Object Identifier (DOI): 10.3386/w18686

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