Are Subjective Expectations Formed as in Rational Expectations Models of Active Management?

109 Pages Posted: 10 Feb 2020 Last revised: 13 Jan 2024

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Markus Ibert

Copenhagen Business School - Department of Finance; Swedish House of Finance

Felix Wilke

Nova School of Business and Economics; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 9, 2024

Abstract

We recover forward-looking expected net-of-fee abnormal returns (alphas) for active equity mutual funds from analyst ratings. In contrast to the typical equilibrium implication of zero alphas, analyst alphas are negative for most funds, but positive for the largest funds. We compare analysts' subjective expectations with expectations from a rational expectations learning model. The model's rational learner believes that an increase in fund size leads to a decrease in returns, but we find no evidence that analysts believe so. Overall, analysts' expectations and the capital that follows analysts' recommendations are difficult to reconcile with existing rational expectations models of active management.

Keywords: Alpha, expectations formation, mutual funds

JEL Classification: G11, G12, G14, G23

Suggested Citation

Dahlquist, Magnus and Ibert, Markus and Wilke, Felix, Are Subjective Expectations Formed as in Rational Expectations Models of Active Management? (January 9, 2024). Swedish House of Finance Research Paper No. 20-4, Available at SSRN: https://ssrn.com/abstract=3531272 or http://dx.doi.org/10.2139/ssrn.3531272

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Markus Ibert (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3, SOL/A4.17
Copenhagen, Frederiksberg 2000

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm, 11160
Sweden

Felix Wilke

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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