Stock market crash and expectations of American households

Abstract

SUMMARY This paper utilizes data on subjective probabilities to study the impact of the stock market crash of 2008 on households’ expectations about the returns on the stock market index. We use data from the Health and Retirement Study that was fielded in February 2008 through February 2009. The effect of the crash is identified from the date of the interview, which is shown to be exogenous to previous stock market expectations. We estimate the effect of the crash on the population average of expected returns, the population average of the uncertainty about returns (subjective standard deviation), and the cross-sectional heterogeneity in expected returns (disagreement). We show estimates from simple reduced-form regressions on probability answers as well as from a more structural model that focuses on the parameters of interest and separates survey noise from relevant heterogeneity. We find a temporary increase in the population average of expectations and uncertainty right after the crash. The effect on cross-sectional heterogeneity is more significant and longer lasting, which implies substantial long-term increase in disagreement. The increase in disagreement is larger among the stockholders, the more informed, and those with higher cognitive capacity, and disagreement co-moves with trading volume and volatility in the market.

Measuring expectations from household surveys: new results on subjective probabilities of future house prices

“…17 Individuals having more optimistic beliefs about returns are more likely to hold stocks. This effect was first found in Dominitz and Manski (2007) and has been confirmed by other authors in various contexts (Hurd et al 2011;Hudomiet et al 2011;Arrondel et al 2011). Importantly, those heterogeneous beliefs seem to present systematic biases.…”

“…Rounding Rounding of responses to the nearest 5 % is often reported although at the tails respondents may round to the nearest 1 % (see for example Dominitz and Manski 1997;Hudomiet et al 2011;Attanasio and Augsburg 2012). Rounding may be influenced to some extent by the design of the visual aid attached to the question, for example, marks on a ruler.…”

Return Expectations and Risk Aversion Heterogeneity in Household Portfolios

“…The existing empirical literature focuses only on stock market expected returns. In this respect, even though the data and the estimation approach are radically different, our results are in line with Dominitz andManski (2011), Hudomiet, Kedzi andWillis (2011) A C C E P T E D M A N U S C R I P T ACCEPTED MANUSCRIPT and Hurd, van Rooij and Winter (2011) in terms of effects of education, ethnicity and age.…”

“…Recent research has focused on the likely presence of various expectation types (Dominitz and Manski, 2011), on how expectations quickly react to sudden downturns in the market (Hoffmann, Post and Pennings, 2013;Hudomiet, Kedzi and Willis, 2011), on their relationship with past performance in financial markets (Hurd, van Rooij and Winter, 2011) and on the quality of the information regarding past performance (Arrondel, Calvo-Pardo and Tas, 2012). Overall, expectations have been found to only moderately correlate with financial market indexes, and to be strongly negatively correlated with model-based expected returns (e.g., Greenwood and Shleifer, 2014).…”

Household risk taking after the financial crisis

“…Psychophysical risk-return models assume also different risk and return expectations (Weber, 2010). Empirical literature confirms that household stock market expectations are heterogeneous (Dominitz & Manski, 2011;Hudomiet, Kezdi, & Willis, 2011;Hurd, van Rooij, & Winter, 2011;Kezdi & Willis, 2008).…”