Be Fearful When Households are Greedy: The Household Equity Share and Expected Market Returns
58 Pages Posted: 2 Oct 2017
Date Written: September 8, 2017
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: Suggested Citation