Expectations of Returns and Expected Returns

By Robin Greenwood, A. Shleifer. 2014

1,005 citations recorded by the source corpus.

We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. We reconcile the evidence by calibrating a simple behavioral model, in which fundamental traders require a premium to accommodate expectations shocks from extrapolative traders, but markets are not efficient.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/f969373156437e64467b33c44250f8b32e6a2142

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Citations in the corpus

Personal Experiences and Expectations about Aggregate Outcomes (2019, positive): “Our results are therefore broadly consistent with models of adaptive and extrapolative updating (as in Fuster, Laibson, and Mendel, 2010; Greenwood and Shleifer, 2014).”
Survey Measurement of Probabilistic Macroeconomic Expectations: Progress and Promise (2017, neutral): “See Vissing- Jorgenson (2004) and Greenwood and Shleifer (2014) for analyses of these data.”
Diagnostic Expectations and Stock Returns (2019, methodology): “We use expectations data not only to predict returns, but also as a central element of the model and its empirical estimation.2 Such data are becoming increasingly common in recent work (Ben David, Graham, and Harvey (2013), Greenwood and Shleifer (2014), Gennaioli, Ma, and Shleifer (2016)).”
Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes (2017, background): “Initially propelled by Minksy (1977) and Kindleberger (1978), this literature conjectures that in good times, agents tend to extrapolate the current state of the world as if it would last forever (e.g., Cheng et al., 2014; Greenwood and Hanson, 2013, 2015; Greenwood and Shleifer, 2014).”
Credit-Market Sentiment and the Business Cycle (2017, positive): “Particularly relevant for the present purposes are recent papers that emphasize extrapolation as a source of mistaken beliefs; these studies include Greenwood and Shleifer (2014) and Koijen, Schmeling, and Vrugt (2015).”
Overheating in Credit Markets: Origins, Measurement, and Policy Responses (2013, background): “6 See Amromin and Sharpe (2012), and Greenwood and Shleifer (2012).”
Imperfect Macroeconomic Expectations: Evidence and Theory (2020, background): “More recently, Greenwood and Shleifer (2014) and Gennaioli, Ma, and Shleifer (2015b) demonstrate patters in survey expectations of stock returns and firm earnings that are also suggestive of over-extrapolation.”
Who Are the Value and Growth Investors (2017, neutral): “For instance, Jagannathan and Wang (1996), Lettau and Ludvigson (2001), Palacios-Huerta (2003), Petkova and Zhang (2005) and Santos and Veronesi (2006) develop conditional versions of the CAPM and C-CAPM that incorporate aggregate income growth and can price the Fama and French portfolios.”
Two centuries of trend following (2014, background): “One plausible interpretation is that when prices become more obviously out of line, fundamentalist traders start stepping in, and this mitigates the impact of trend followers which are still lured in by the strong trend (see [18, 35, 19] for similar stories).”
Stock Price Booms and Expected Capital Gains (2017, positive): “As pointed out by Vissing-Jorgensen (2003), Greenwood and Shleifer (2014) and a previous version of the current paper, survey expectations of future returns (or capital gains) display a positive correlation with the PD ratio, while actual returns (or capital gains) display a negative correlation.”
Social Transmission Bias and Investor Behavior (2021, neutral): “investor extrapolativeness of expectations using both survey approaches (Case and Shiller (1988), DeBondt (1993), and Vissing-Jorgensen (2003)) and field evidence (Haruvy, Lahav, and Noussair (2007), Greenwood and Shleifer (2014), and Hoffmann, Post, and Pennings (2015)); such estimates provide a po”
Salience theory and stock prices: Empirical evidence (2021, background): “Moreover, recent survey evidence indicates that investors over-extrapolate past returns when forming expectations about future returns (Greenwood and Shleifer (2014). Salience theory differs from these existing behavioral theories because it predicts that investors’ reaction to information is contex”
Quantifying Sentiment with News Media across Local Housing Markets (2018, background): “Greenwood and Shleifer (2014) examine six di↵erent surveys of investor expectations on the stock market, and find that investor expectations do appear to extrapolate from past stock market returns.”