Expectations of Returns and Expected Returns
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.
We thank Yueran Ma for outstanding research assistance and Josh Coval, Jared Dourdeville, Sam Hanson, Owen Lamont, Stefan Nagel, Joshua Schwartzstein, Adi Sunderam, Annette Vissing-Jorgensen, Jessica Wachter, Fan Zhang and seminar participants at UC Berkeley and the NBER for helpful suggestions. We are grateful to the Survey Research Center at the University of Michigan for providing access to their data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Robin Greenwood & Andrei Shleifer, 2014. "Expectations of Returns and Expected Returns," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 714-746. citation courtesy of