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Recovering investor expectations from demand for index funds

Author: Mark L Egan; Alexander J MacKay; Hanbin Yang; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2020.
Series: Working paper series (National Bureau of Economic Research), no. 26608.
Edition/Format:   eBook : Document : English
Summary:
We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected returns. Despite the fact that they are generated from a different method (realized choices) and a different population, our quarterly estimates of  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Mark L Egan; Alexander J MacKay; Hanbin Yang; National Bureau of Economic Research,
OCLC Number: 1135759691
Notes: "January 2020"
Description: 1 online resource (62 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 26608.
Responsibility: Mark L. Egan, Alexander MacKay, Hanbin Yang.

Abstract:

We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected returns. Despite the fact that they are generated from a different method (realized choices) and a different population, our quarterly estimates of investor expectations are positively and significantly correlated with the leading surveys used to measure stock market expectations. Our estimates suggest that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors. Our analysis is facilitated by the prevalence of "leveraged" funds, i.e., funds that provide the investor with a menu over leverage. The menu of choices allows us to separately estimate expectations and risk aversion. We estimate that the availability of these funds provides investors with significant (ex ante) consumer surplus.

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