Do Survey Expectations of Stock Returns Reflect Risk-Adjustments?
Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the asset pricing literature are consistent with the survey evidence. We empirically test (1) the notion that survey forecasts constitute rational but risk-neutral forecasts of future returns, and (2) the notion that survey forecasts are ambiguity averse/robust forecasts of future returns. We find that these alternative hypotheses are also strongly rejected by the data, albeit for different reasons. Hypothesis (1) is rejected because survey return forecasts are not in line with risk-free interest rates and because survey expected excess returns are predictable. Hypothesis (2) is rejected because agents are not always pessimistic about future returns, instead often display overly optimistic return expectations. We speculate as to what kind of expectations theories might be consistent with the available survey evidence.
We would like to thank Jarda Borovicka, James Choi, Charles Manski and seminar participants at the CESifo Venice Summer Institute Workshop on ”Expectation Formation” for helpful comments and suggestions. The views expressed in this paper do not necessarily represent those of the Bank of Canada. Nagel thanks the Fama-Miller Center at the University of Chicago for research support. Klaus Adam thanks the Collaborative Research Center Transregio 224 sponsored by the German Research Foundation (DFG) for research support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Klaus Adam & Dmitry Matveev & Stefan Nagel, 2020. "Do Survey Expectations of Stock Returns Reflect Risk Adjustments?," Journal of Monetary Economics, .