From the Horse's Mouth: Economic Conditions and Investor Expectations of Risk and Return

Gene Amromin and Steven Sharpe

Management Science, 2014, vol. 60, issue 4, 845-866

Abstract: Data obtained from monthly Gallup/UBS surveys from 1998 to 2007 and from a special supplement to the Michigan Surveys of Consumer Attitudes and Behavior, run in 22 monthly surveys between 2000 and 2005, are used to analyze stock market beliefs and portfolio choices of household investors. We show that the key variables found to be positive predictors of actual stock returns in the asset-pricing literature are also highly correlated with investor's subjective expected returns, but with the opposite sign. Moreover, our analysis of the microdata indicates that subjective expectations of both risk and returns on stocks are strongly influenced by perceptions of economic conditions. In particular, when investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This is difficult to reconcile with the canonical view that expected returns on stocks rise during recessions to compensate household investors for increased exposure or sensitivity to macroeconomic risks. Finally, the relevance of these investors' subjective expectations is supported by the finding of a significant link between their expectations and portfolio choices. In particular, we show that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns or lower uncertainty. This paper was accepted by Brad Barber, finance.

Keywords: investor sentiment; expected stock returns; portfolio choice; asset pricing (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2013.1806 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:60:y:2014:i:4:p:845-866

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().