40 Pages Posted: 2 Dec 2012
Date Written: November 29, 2012
Data obtained from monthly Gallup/UBS surveys from 1998-2007 and from a special supplement to the Michigan Surveys of Consumer Attitudes, run in 22 monthly surveys between 2000-2005, are used to analyze stock market beliefs and portfolio choices of household investors. We show that the key variables found to be positive predictors of actual stock returns in the asset-pricing literature are also highly correlated with investor’s reported expected returns, but with the opposite sign. Moreover, analysis of the micro data indicates that expectations of both risk and returns on stocks are strongly influenced by perceptions of economic conditions. In particular, when investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This is difficult to reconcile with the canonical view that expected returns on stocks rise during recessions to compensate household investors for increased exposure or sensitivity to macroeconomic risks. Finally, the relevance of these investors’ reported expectations is supported by the finding of a significant link between their expectations and portfolio choices. In particular, we show that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns or lower uncertainty.
Keywords: expected returns, household investors, economic conditions
JEL Classification: G11, G12, D14
Suggested Citation: Suggested Citation
Amromin, Gene and Sharpe, Steven A., From the Horse's Mouth: How Do Investor Expectations of Risk and Return Vary with Economic Conditions? (November 29, 2012). FRB of Chicago Working Paper No. 2012-08. Available at SSRN: https://ssrn.com/abstract=2182622 or http://dx.doi.org/10.2139/ssrn.2182622