Working Paper: NBER ID: w18686
Authors: Robin Greenwood; Andrei Shleifer
Abstract: 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.
Keywords: Investor Expectations; Stock Market Returns; Behavioral Finance
JEL Codes: G02; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor expectations (D84) | Model-based expected returns (C51) |
| Investor expectations (D84) | Market returns (G19) |
| Model-based expected returns (C51) | Market returns (G19) |
| Past stock returns (G17) | Investor expectations (D84) |
| Extrapolative traders (F17) | Market dynamics (D49) |
| Fundamental traders (G13) | Market dynamics (D49) |