Expectations data in asset pricing

Adam, Klaus; Nagel, Stefan

doi:10.1016/b978-0-12-822927-9.00024-0

Cited by 28 publications

(5 citation statements)

References 48 publications

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“…Because we have precise control over the stochastic process that generates dividends, here we can assess (i) the extent to which subjective beliefs depart from rational beliefs and (ii) whether beliefs that are closer to the rational benchmark are transmitted more vigorously into actions. Given the large literature on subjective expectation formation in finance (Adam and Nagel (2023)), it is useful to explore whether the severity of expectation errors has any bearing on the degree to which these errors are transmitted into investment actions.…”

Section: Resultsmentioning

confidence: 99%

“…Survey data on subjective beliefs have recently opened up a vibrant area of research in asset pricing (Adam and Nagel (2023)). Subjective beliefs data offer the promise of disciplining models using the expectations that investors actually report, rather than the rational expectations that investors are typically assumed to hold.…”

Section: Discussionmentioning

confidence: 99%

“…Over the past decade, there has been an enormous amount of theoretical and empirical work on expectation formation in finance (Adam and Nagel (2023)). Several researchers have proposed models with the goal of jointly explaining asset prices and survey expectations (e.g., Barberis et al (2015), Hirshleifer, Li, and Yu (2015), Jin and Sui (2022)).…”

Section: A1 Incorporating Weak Transmission Into Investor Decisionsmentioning

confidence: 99%

“…Finally, we discuss how cognitive noise can provide a microfoundation for inelastic demand in the stock market.ECONOMISTS HAVE SPENT THE PAST several years using surveys to document facts about investors' expectations of stock returns. A clear fact that emerges from this literature is that the subjective expected returns that investors report in surveys depart systematically from objective expected returns (Greenwood and Shleifer (2014), Adam and Nagel (2023), Nagel and Xu ( 2023)). This fact rejects standard rational expectations models and has motivated a new class of asset pricing theories that aim to match both subjective expectations and realized returns (e.g.,…”

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confidence: 99%

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Insensitive Investors

CHARLES,

FRYDMAN,

KILIC

2024

The Journal of Finance

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We experimentally study the transmission of subjective expectations into actions. Subjects in our experiment report valuations that are far too insensitive to their expectations, relative to the prediction from a frictionless model. We propose that the insensitivity is driven by a noisy cognitive process that prevents subjects from precisely computing asset valuations. The empirical link between subjective expectations and actions becomes stronger as subjective expectations approach rational expectations. Our results highlight the importance of incorporating weak transmission into belief‐based asset pricing models. Finally, we discuss how cognitive noise can provide a microfoundation for inelastic demand in the stock market.

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Section: Resultsmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Section: A1 Incorporating Weak Transmission Into Investor Decisionsmentioning

confidence: 99%

mentioning

confidence: 99%

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Insensitive Investors

CHARLES,

FRYDMAN,

KILIC

2024

The Journal of Finance

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“…This result is consistent with Silver and Raseta's 2021 findings on cohort effects in the ICS. The cited results are taken to imply that there is likely to be more to agent expectations than the strictly rational processing of the objective content in the exogenous flow of information (See Adam and Nagel, 2023) [1].…”

Section: Expectations and Market Pricementioning

confidence: 99%

Agent expectations and news sentiment in the dynamics of price in a financial market

Silver

2024

RBF

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PurposeAlthough the effects of both news sentiment and expectations on price in financial markets have now been extensively demonstrated, the jointness that these predictors can have in their effects on price has not been well-defined. Investigating causal ordering in their effects on price can further our understanding of both direct and indirect effects in their relationship to market price.Design/methodology/approachWe use autoregressive distributed lag (ARDL) methodology to examine the relationship between agent expectations and news sentiment in predicting price in a financial market. The ARDL estimation is supplemented by Grainger causality testing.FindingsIn the ARDL models we implement, measures of expectations and news sentiment and their lags were confirmed to be significantly related to market price in separate estimates. Our results further indicate that in models of relationships between these predictors, news sentiment is a significant predictor of agent expectations, but agent expectations are not significant predictors of news sentiment. Granger-causality estimates confirmed the causal inferences from ARDL results.Research limitations/implicationsTaken together, the results extend our understanding of the dynamics of expectations and sentiment as exogenous information sources that relate to price in financial markets. They suggest that the extensively cited predictor of news sentiment can have both a direct effect on market price and an indirect effect on price through agent expectations.Practical implicationsEven traditional financial management firms now commonly track behavioral measures of expectations and market sentiment. More complete understanding of the relationship between these predictors of market price can further their representation in predictive models.Originality/valueThis article extends the frequently reported bivariate relationship of expectations and sentiment to market price to examine jointness in the relationship between these variables in predicting price. Inference from ARDL estimates is supported by Grainger-causality estimates.

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Are survey stock price forecasts anchored by fundamental forecasts? A long-run perspective

Kuang,

Tang,

Zhang

et al. 2024

Econ Theory

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This paper firstly shows that a wide range of asset pricing models, including full information and Bayesian rational expectations models, typically imply that agents use the long-run cointegration relationship between stock prices and fundamentals to forecast future stock prices. However, using several widely used survey forecast datasets, we provide robust new evidence that survey forecasts of aggregate stock price indices are not cointegrated with forecasts of fundamentals (aggregate consumption, dividend, and output), both at the consensus and individual level. We argue that it is crucial to relax investors’ common knowledge of the equilibrium pricing function to reconcile this finding.

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Expectations data in asset pricing

Cited by 28 publications

References 48 publications

Insensitive Investors

Insensitive Investors

Agent expectations and news sentiment in the dynamics of price in a financial market

Are survey stock price forecasts anchored by fundamental forecasts? A long-run perspective

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