Recovering Investor Expectations from Demand for Index Funds

Mark L. Egan, Alexander MacKay and Hanbin Yang

No 26608, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected future returns across investors. Our analysis is facilitated by the prevalence of leveraged funds that track the same underlying asset: by choosing between higher and lower leverage, investors trade off higher return against less risk. Our estimates indicate that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors due to the presence of contrarian investors.

JEL-codes: D12 D81 D84 G11 G50 L0 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-upt
Note: AP CF IO
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Citations: View citations in EconPapers (2)

Published as Mark Egan & Alexander MacKay & Hanbin Yang, 2022. "Recovering Investor Expectations from Demand for Index Funds," The Review of Economic Studies, vol 89(5), pages 2559-2599.

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