Expectations Data in Asset Pricing

Klaus Adam and Stefan Nagel

No 29977, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Asset prices reflect investors' subjective beliefs about future cash flows and prices. In this chapter, we review recent research on the formation of these beliefs and their role in asset pricing. Return expectations of individual and professional investors in surveys differ markedly from those implied by rational expectations models. Variation in subjective expectations of future cash flows and price levels appear to account for much of aggregate stock market volatility. Mapping the survey evidence into agent expectations in asset pricing models is complicated by measurement errors and belief heterogeneity. Recent efforts to build asset pricing models that match the survey evidence on subjective belief dynamics include various forms of learning about payout or price dynamics, extrapolative expectations, and diagnostic expectations. Challenges for future research include the exploration of subjective risk perceptions, aggregation of measured beliefs, and links between asset market expectations and the macroeconomy.

JEL-codes: E71 G12 G41 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-fmk and nep-mac
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Working Paper: Expectations Data in Asset Pricing (2022)
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