Working Paper: NBER ID: w25122
Authors: Klaus Adam; Dmitry Matveev; Stefan Nagel
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 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.
Keywords: Survey Expectations; Stock Returns; Risk Adjustments; Ambiguity Aversion
JEL Codes: E03; G12; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| empirical dynamics of expected returns do not align with predictions of rational expectations models (D84) | rejection of the risk-neutral expectations hypothesis (D81) |
| survey forecasts do not reflect rational risk-neutral expectations (G17) | expected returns from surveys exceed the risk-free rate (G17) |
| expected returns are predictable based on cyclical variables (G17) | expected returns from surveys exceed the risk-free rate (G17) |
| survey expectations are not consistently pessimistic (P17) | investors display overly optimistic return expectations (G17) |
| expected returns reported are approximately unbiased as forecasts of realized returns (G17) | investors display overly optimistic return expectations (G17) |