Do survey expectations of stock returns reflect risk adjustments?

Abstract

We would like to thank Jarda Borovicka, James Choi, Charles Manski and seminar participants at the CESifo Venice Summer Institute Workshop on "Expectation Formation" for helpful comments and suggestions. The views expressed in this paper do not necessarily represent those of the Bank of Canada. Nagel thanks the Fama-Miller Center at the University of Chicago for research support. Klaus Adam thanks the Collaborative Research Center Transregio 224 sponsored by the German Research Foundation (DFG) for research support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Five Facts About Beliefs and Portfolios

“…Alternatively, one could make the demand of non-behavioral agents even less elastic than the demand of behavioral agents, for example by introducing noise traders. With this adjustments, the low sensitivity suggests that prices have to adjust by more than in the frictionless case for the behavioral agents to absorb 1 Greenwood and Shleifer (2014) and Adam, Matveev and Nagel (2018) provide evidence against the conjecture that surveys simply reflect risk-neutral expectations. 2 As discussed above, the existing work exploring the response of stock holdings to expected stock market returns among retail investors finds similarly low elasticities.…”

Five Facts about Beliefs and Portfolios

“…We also contribute to a macro-finance literature that has debated the tradeoffs between behavioral and rational modeling approaches, with survey evidence providing an important input (see Cochrane, 2011Cochrane, , 2017Greenwood and Shleifer, 2014;Adam, Matveev and Nagel, 2018). Among the many proposed equilibrium models, the most relevant for our work are those that directly incorporate survey evidence (e.g., Barberis et al, 2015;Adam, Marcet and Beutel, 2017;Bhandari, Borovička and Ho, 2016) and those that feature heterogeneous belief (e.g., Scheinkman and Xiong, 2003;Geanakoplos, 2010;Caballero and Simsek, 2017;Martin and Papadimitriou, 2019).…”

Predictability Concentrates in Bad Times. And so Does Disagreement

“…The contribution to this literature is to explain that variations in the price of risk (for any reason) imply variations in return predictability. The paper also relates to the discussion about whether analysts answer surveys with risk neutral probabilities (Cochrane, 2017), or not (Adam et al, 2018). 6 2 A general risk-based asset pricing framework Let ζ = (ζ t ) be the unique stochastic discount factor (SDF) that follows the continuous-time stochastic process…”

“…This conclusion holds whether analysts report risk neutral expectations in a strict sense or whether they use a different (and possibly time-varying) rate to discount their expectations. For example, Adam et al (2018) argue that agents do not report exact risk neutral probabilities: The expected returns reported in surveys are systematically larger than the risk-free rate. However, the conclusions that I present hold regardless of the actual rate used to discount expectations.…”

“…where E [] is (strictly) the risk neutral expectation if the expected value E [D t+1 ] is discounted at the riskfree rate,r t = r f . A different discount rate,r t > r f (Adam et al, 2018), simply multiplies the expectation by a different constant. It has no impact on the cross-sectional analysis that follows.…”