Survey Expectations and the Equilibrium Risk-Return Trade Off

Roberto Marfè
Authors registered in the RePEc Author Service: Roberto Marfe ()

No 408, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Intuition and leading equilibrium models are at odds with the empirical evidence that expected returns are weakly related to volatility at the market level. This paper proposes a closed-form general equilibrium model, which connects the investors’ expectations of fundamentals with those of market returns, as documented by survey data. Forecasts suggest that investors feature pro-cyclical optimism and, then, overestimate the persistence of aggregate risk. The forward-looking component of stock volatility offset the transient risk and leads to a weak risk-return relation, in line with survey data about market returns. The model mechanism is robust to many features of financial markets.

Keywords: risk-return trade off; survey expectations; general equilibrium; optimism; asset pricing puzzles; heterogeneous preferences; closed-form expression (search for similar items in EconPapers)
JEL-codes: D51 D53 D83 G11 G12 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2015
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:408

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