Stock Market Expectations of Dutch Households

Abstract

Despite its importance for the analysis of life-cycle behavior and, in particular, retirement planning, stock ownership by private households is poorly understood. Among other approaches to investigate this puzzle, recent research has started to elicit private households' expectations of stock market returns. This paper reports findings from a study that collected data over a two-year period both on households' stock market expectations (subjective probabilities of gains or losses) and on whether they own stocks. We document substantial heterogeneity in financial market expectations. Expectations are correlated with stock ownership. Over the two years of our data, stock market prices increased, and expectations of future stock market price changes also increased, lending support to the view that expectations are influenced by recent stock gains or losses.

Stock market crash and expectations of American households

“…Our finding suggests that there is heterogeneity in the cognitive processes (or mental models) people use to convert public news into personal probability beliefs, in accordance with some of the disagreement literature we mentioned above. The results on changes in heterogeneity complement recent empirical investigations that show substantial heterogeneity in stock market expectations of individual investors (Vissing‐Jorgensen, 2003) as well as households (Calvet et al , 2007, 2009a,b; Dominitz and Manski, 2007; Kezdi and Willis, 2008; Hurd et al , 2009; Gouret and Hollard, 2010). This paper adds new results to this empirical literature by showing that the stock market crash and the financial crisis had significant effects on average expectations, average uncertainty, and, perhaps most importantly, the heterogeneity of expectations.…”

“…When the stock market is increasing, average beliefs become more optimistic and conversely. See, for example, Kezdi and Willis (2008) about American households and Hurd et al (2009) about Dutch households. According to Kezdi and Willis (2008), it took a 500‐point gain in the Dow Jones to generate a one percentage point gain in expected yearly returns in 2002.…”

Subjective Probabilities in Household Surveys

“…In April, 2004 respondents were asked about their subjective probabilities of stock market gains with reference to mutual fund invested in “blue chip” stocks like those in the Amsterdam AEX stock market index or similar indices. Respondent were asked about the probability of any gain, of a gain of 10% or more, 20% or more, and 30% or more, and the probability of a loss, of a loss of 10% or more, 20% or more, and 30% or more (Hurd, van Rooij & Winter, 2008). Following Dominitz & Manski (1997), Hurd et al fit individual normal distributions to the eight probability points reported by each person, producing a population distribution of the expected gain and of the variance of gain.…”

Measuring and interpreting expectations of equity returns

“…The first complete draft of this paper was circulated as Dominitz and Manski (2005). Subsequent work, some of it building on this paper, includes Dominitz and Manski (2007), Kezdi and Willis (2008), Hurd (2009), Hurd et al (2010), Hudomiet et al (2010) and Gouret and Hollard (2010).…”