Working Paper: NBER ID: w31687
Authors: Mihir Gandhi; Niels Joachim Gormsen; Eben Lazarus
Abstract: We measure investors’ short- and long-term stock-return expectations using both options and survey data. These expectations at different horizons reveal what investors think their own short-term expectations will be in the future, or forward return expectations. While contemporaneous short-term expectations are not countercyclical across all data sources, we find that forward expectations are consistently countercyclical, and excessively so: in bad times, forward expectations are higher than justified by investors’ own subsequent short-term return expectations. This excess volatility in forward expectations helps account for excess volatility in prices, inelastic demand for equities, and stylized facts about the equity term structure.
Keywords: No keywords provided
JEL Codes: G0; G01; G1; G10; G11; G12; G13; G14; G17; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward expectations of returns (G17) | excess cyclicality in forward expectations (E32) |
| excess cyclicality in forward expectations (E32) | excess volatility in stock prices (G17) |
| misperceived expectations (D84) | market volatility (G17) |
| investors' overestimation of future returns (G17) | higher forward expectations (D84) |
| negative shocks (F69) | overestimation of future returns (G17) |