Return Expectations in the Aggregate Stock Market
I devise a measure of aggregate stock market expectations which combines evidence of age-based heterogeneity in return extrapolation, with data on demographics, stock market participation, and prevalence of direct investing over delegated portfolio management. In the sample period 1961-2013, a one percentage point rise in aggregate expectations of future stock returns is followed by a 3 percentage point decline in subsequent yearly excess returns. A simple measure of bias in expectations, which captures procyclical aggregate optimism, has an out-of-sample R2 of 17%.
Gulen, Purdue University.
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