Expecting a Stock Market Miracle

44 Pages Posted: 2 Apr 2016

See all articles by Markku Kaustia

Markku Kaustia

Aalto University School of Business

Joni Kokkonen

Catolica-Lisbon School of Business and Economics

Vesa Puttonen

Aalto University - School of Business

Date Written: March 23, 2016

Abstract

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

Kaustia, Markku and Kokkonen, Joni and Puttonen, Vesa, Expecting a Stock Market Miracle (March 23, 2016). Available at SSRN: https://ssrn.com/abstract=2757631 or http://dx.doi.org/10.2139/ssrn.2757631

Markku Kaustia (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
+3589 4313 8475 (Phone)
+3589 4313 8678 (Fax)

Joni Kokkonen

Catolica-Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Vesa Puttonen

Aalto University - School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
358 407090284 (Phone)
358 0 4313678 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
190
Abstract Views
1,272
rank
165,352
PlumX Metrics