Demand-based Expected Returns

Alessandro Crescini, Fabio Trojani and Andrea Vedolin
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Alessandro Crescini: Swiss Finance Institute - University of Geneva
Fabio Trojani: University of Geneva; University of Turin - Department of Statistics and Applied Mathematics; Swiss Finance Institute
Andrea Vedolin: Boston University - Department of Finance & Economics

No 25-90, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a framework to extract heterogeneous investors' subjective beliefs by combining option prices and portfolio holdings. We show how to recover investor-specific expected returns and risks, consensus beliefs, and belief dispersion. Using S&P 500 options' buy-sell order data, we find that subjective expected returns and Sharpe ratios vary by investor type and depend on portfolio composition. Beliefs inferred from prices alone display strong counter-cyclicality, whereas those incorporating holdings can reverse sign, exhibit muted cyclicality, and align with professional survey expectations under markettiming strategies. Our results highlight the value of holdings data in belief recovery.

Keywords: Subjective Expected Returns; Subjective Risk; Options; Holdings; Recovery (search for similar items in EconPapers)
Pages: 62 pages
Date: 2025-10
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2590

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