Be Fearful When Households are Greedy: The Household Equity Share and Expected Market Returns

58 Pages Posted: 2 Oct 2017

See all articles by David Yang

David Yang

University of California, Irvine - Paul Merage School of Business

Fan Zhang

PrepScholar Education

Date Written: September 8, 2017

Abstract

We empirically document that the “dumb money” effect exists for the aggregate stock market. We define the “Household Equity Share” (HEShare), the share of household equity and fixed income assets allocated to equities. HEShare negatively forecasts excess returns on the aggregate US stock market, both univariately and after controlling for past changes in equity prices and common market return forecasters. The non-household sector’s equity share does not forecast returns, ruling out economy-wide explanations for HEShare’s return predictability. At times, HEShare predicts negative mean excess returns on the market, suggesting that behavioral factors explain our findings.

Keywords: dumb money effect, household financial holdings, return predictability, aggregate stock returns

JEL Classification: G11, G12

Suggested Citation

Yang, David and Zhang, Fan, Be Fearful When Households are Greedy: The Household Equity Share and Expected Market Returns (September 8, 2017). Available at SSRN: https://ssrn.com/abstract=3034548 or http://dx.doi.org/10.2139/ssrn.3034548

David Yang (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

HOME PAGE: http://www.DavidCYang.com

Fan Zhang

PrepScholar Education ( email )

810 Memorial Dr, Suite 3L
Cambridge, MA 02139
United States

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