Working Paper: CEPR ID: DP13213
Authors: Klaus Adam; Stefan Nagel; Dmitry Matveev
Abstract: 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 thatthese 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 excessreturns 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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| survey expectations do not reflect rational risk-neutral forecasts (G17) | survey return forecasts exceed risk-free interest rates (G17) |
| survey expectations are not consistently pessimistic (P17) | survey expectations often display an optimistic bias (C83) |
| survey respondents do not overweight negative outcomes (C83) | survey expectations are not influenced by ambiguity aversion (D81) |
| procyclical nature of expected returns (D84) | contradicts countercyclical predictions of rational expectations models (E32) |