Discussion paper

DP13213 Do Survey Expectations of Stock Returns Reflect Risk-Adjustments?

Motivated by the observation that survey expectations of stock returns are inconsistent with rational return expectations under real-world probabilities, we investigate whether alternative expectations hypotheses entertained in the asset pricing literature are consistent with the survey evidence. We empirically test (1) the notion that survey forecasts constitute rational but risk-neutral forecasts of future returns, and (2) the notion that survey forecasts are ambiguity averse/robust forecasts of future returns. We find that
these alternative hypotheses are also strongly rejected by the data, albeit for different reasons. Hypothesis (1) is rejected because survey return forecasts are not in line with risk-free interest rates and because survey expected excess
returns are predictable. Hypothesis (2) is rejected because agents are not always pessimistic about future returns, instead often display overly optimistic return expectations. We speculate as to what kind of expectations theories might be consistent with the available survey evidence.

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Citation

Adam, K and S Nagel (2018), ‘DP13213 Do Survey Expectations of Stock Returns Reflect Risk-Adjustments?‘, CEPR Discussion Paper No. 13213. CEPR Press, Paris & London. https://cepr.org/publications/dp13213