Recovering Investor Expectations from Demand for Index Funds

91 Pages Posted: 6 Jan 2020 Last revised: 15 Sep 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: January 2020

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.

Suggested Citation

Egan, Mark and MacKay, Alexander and Yang, Hanbin, Recovering Investor Expectations from Demand for Index Funds (January 2020). NBER Working Paper No. w26608, Available at SSRN: https://ssrn.com/abstract=3514346

Mark Egan (Contact Author)

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Alexander MacKay

Harvard University - Business School (HBS) ( email )

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Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Hanbin Yang

Harvard University ( email )

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