Behavioral Measures of Expected Market Return

50 Pages Posted: 22 Mar 2012 Last revised: 21 Aug 2012

See all articles by C. Thomas Howard

C. Thomas Howard

University of Denver - Daniels College of Business; AthenaInvest

Date Written: August 20, 2012


Investor behavior is an important determinant of individual as well as market-wide equity returns. In this study, I extend the behavioral investing literature by introducing Strategy Market Barometers, that are based on the extent to which investors are currently rewarding one equity strategy over another. I combine US and International Strategy Market Barometers with Baker & Wurgler’s (2006) Sentiment Index, and other variables, to explain subsequent S&P 500, Russell 2000, and EAFE returns. The empirical results for January 1981 through December 2011 produce an astonishing 12 month expected equity premium range of 60%, compared to an actual annual equity premium range of 115% over this same time period. The results, which are both economically and statistically significant, cannot be explained by trailing equity premiums nor changing economic fundamentals. The predictive power of the Strategy Market Barometers and the Sentiment Index produce a behavioral measure of expected equity premiums. Thus I provide evidence that expected equity market returns vary widely over time and that investor behavior is a much more important contributor to this variability than are changing economic fundamentals, both results consistent with the predictions of Shefrin’s Pricing Kernel Model.

Keywords: behavioral investing, investment strategy, sentiment index, expected market return

JEL Classification: G12, G15, C82

Suggested Citation

Howard, C. Thomas, Behavioral Measures of Expected Market Return (August 20, 2012). Available at SSRN: or

C. Thomas Howard (Contact Author)

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd.
Denver, CO 80208
United States

AthenaInvest ( email )

5340 S Quebec St
Suite 365N
Greenwood Village, CO 80111
United States

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