Forward Return Expectations

Mihir Gandhi (), Niels Gormsen and Eben Lazarus

No 31687, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We measure investors’ short- and long-term stock-return expectations using both options and survey data. These expectations at different horizons reveal what investors think their own short-term expectations will be in the future, or forward return expectations. While contemporaneous short-term expectations are not countercyclical across all data sources, we find that forward expectations are consistently countercyclical, and excessively so: in bad times, forward expectations are higher than justified by investors’ own subsequent short-term return expectations. This excess volatility in forward expectations helps account for excess volatility in prices, inelastic demand for equities, and stylized facts about the equity term structure.

JEL-codes: G0 G01 G1 G10 G11 G12 G13 G14 G17 G4 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-fmk
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