Recovering Investor Expectations from Demand for Index Funds

90 Pages Posted: 11 Jan 2020 Last revised: 30 Jul 2021

See all articles by Mark Egan

Mark Egan

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Alexander MacKay

Harvard University - Business School (HBS)

Hanbin Yang

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2021

Abstract

We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected future returns across investors. Our analysis is facilitated by the prevalence of leveraged funds that track the same underlying asset: by choosing between higher and lower leverage, investors trade off higher return against less risk. Our estimates indicate that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors due to the presence of contrarian investors.

Keywords: Stock Market Expectations, Demand Estimation, Exchange-Traded Funds (ETFs)

JEL Classification: D12, D81, D84, G11, G50, L0

Suggested Citation

Egan, Mark and MacKay, Alexander and Yang, Hanbin, Recovering Investor Expectations from Demand for Index Funds (July 27, 2021). Available at SSRN: https://ssrn.com/abstract=3506732 or http://dx.doi.org/10.2139/ssrn.3506732

Mark Egan

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Baker Library 365
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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Alexander MacKay (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Hanbin Yang

Harvard University ( email )

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