The influence of short-term subjective expectations on stock price movements

Johannes Schmidt ()
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Johannes Schmidt: University of St. Gallen

Financial Markets and Portfolio Management, 2025, vol. 39, issue 3, No 1, 303-333

Abstract: Abstract This paper examines the role of short-term subjective expectations in asset pricing by analyzing their explanatory power for stock price movements. I use a sample of the Swiss stock market from 2003 to 2022 to compute aggregate measures of subjective expectations. I find a strong positive relationship between subjective growth expectations and future realized growth. Furthermore, I observe that the forecast errors of subjective growth expectations are predictable, which should not be the case in a world of rational expectations. The proportions of variation in the price-dividend, price-earnings, and price-to-cash flow ratio are estimated using a variance decomposition approach. The results indicate that subjective expectations significantly contribute to these variations.

Keywords: Asset pricing; Variance decomposition; Subjective expectations; Investor beliefs; Stock price movements; Swiss stock market (search for similar items in EconPapers)
JEL-codes: G12 G15 G40 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11408-025-00469-6

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