Recovering Investor Expectations from Demand for Index Funds

76 Pages Posted: 11 Jan 2020 Last revised: 31 Aug 2020

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: August 27, 2020

Abstract

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 returns. 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. Although generated from a different method (realized choices) and a different population, our quarterly estimates of investor expectations are positively and significantly correlated with the leading surveys used to measure stock market expectations. Our estimates suggest 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 a large fraction 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 (August 27, 2020). 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 )

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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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