Inside the Mind of a Stock Market Crash

25 Pages Posted: 28 May 2020

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Matteo Maggiori

Harvard University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stephen P. Utkus

Vanguard

Multiple version iconThere are 3 versions of this paper

Date Written: May 2020

Abstract

We analyze how investor expectations about economic growth and stock returns changed dur- ing the February-March 2020 stock market crash induced by the COVID-19 pandemic, as well as during the subsequent partial stock market recovery. We surveyed retail investors who are clients of Vanguard at three points in time: (i) on February 11-12, around the all-time stock market high, (ii) on March 11-12, after the stock market had collapsed by over 20%, and (iii) on April 16-17, after the market had rallied 25% from its lowest point. Following the crash, the average investor turned more pessimistic about the short-run performance of both the stock market and the real economy. Investors also perceived higher probabilities of both further extreme stock market declines and large declines in short-run real economic activity. In contrast, investor expectations about long-run (10-year) economic and stock market outcomes remained largely unchanged, and, if anything, improved. Disagreement among investors about economic and stock market outcomes also increased substantially following the stock market crash, with the disagreement persisting through the partial market recovery. Those respondents who were the most optimistic in February saw the largest decline in expectations, and sold the most equity. Those respondents who were the most pessimistic in February largely left their portfolios unchanged during and after the crash.

Keywords: behavioral finance, Expectations, Rare Disasters, sentiment, Surveys, Trading

JEL Classification: G11, G12, R30

Suggested Citation

Giglio, Stefano and Maggiori, Matteo and Stroebel, Johannes and Utkus, Stephen P., Inside the Mind of a Stock Market Crash (May 2020). CEPR Discussion Paper No. DP14813, Available at SSRN: https://ssrn.com/abstract=3612884

Stefano Giglio (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
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Matteo Maggiori

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stephen P. Utkus

Vanguard ( email )

100 Vanguard Boulevard, G13
Malvern, PA 19355
United States
610-669-6308 (Phone)

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