Expecting a Stock Market Miracle
44 Pages Posted: 2 Apr 2016
Date Written: March 23, 2016
We develop two new methods for calibrating subjective expectations regarding the return generating process (RGP) of financial assets without resorting to noisy realized returns. Using finance professionals’ expectations of average and extreme returns, volatilities, and probabilities of stocks beating bonds, we investigate what these expectations imply of other key aspects of the RGP, namely stock-bond correlation, stock mean-reversion, and tails of the return distribution. We find a high degree of confidence in stocks beating bonds, with moderate returns and volatility, and no extreme returns. For most subjects these expectations imply implausible RGP’s given established empirical facts, or else, a miracle.
Keywords: Return expectations, Optimism, Miscalibration
JEL Classification: G11, G12, D84, C61
Suggested Citation: Suggested Citation