Working Paper: NBER ID: w19103
Authors: Robin L. Lumsdaine; Rogier J.D. Potter van Loon
Abstract: This paper challenges recent conventional wisdom of a divide between Main Street (the average American consumer) and Wall Street (financial market participants). The views of survey respondents regarding the likelihood of stock index returns exceeding specific thresholds are compared to market views indicated by index options with strikes at analogous thresholds. The econometric specification explicitly addresses some important impediments to using elicited probabilities from survey data. We confirm that Main Street views track Wall Street views, although the association is not one-for one. We find a closer association for those demonstrating a better understanding of the laws of probability.
Keywords: Wall Street; Main Street; Probabilities; Financial Markets; Expectations
JEL Codes: C58; D84; G02; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| probabilities extracted from option prices (Wall Street views) (G13) | survey responses (Main Street views) (C83) |
| ten percentage point increase in Wall Street's probability of future DJIA returns exceeding a threshold (G17) | more than one percentage point increase in Main Street's beliefs (E49) |
| respondents' understanding of probability (C83) | association between Wall Street and Main Street views (G24) |
| demographic factors (women, older respondents, lower educational attainment) (J21) | subjective probabilities reported by Main Street (C11) |
| past stock market performance (G17) | expectations of Main Street respondents (P17) |